Pareto's Law
Definition
Pareto's law, also called the 80/20 rule, is the principle that a small share of causes drives most of the effect — in supply chains, typically about 20% of SKUs, customers, or suppliers account for roughly 80% of value or volume.
In Practice
Pareto's law is the engine behind most supply chain segmentation. ABC inventory classification ranks SKUs by annual dollar usage and finds the familiar shape: the top slice of items dominates value and earns tight control, while the long tail gets simple automated rules. The same curve appears in spend analysis (a few suppliers carry most spend), quality (a few defect types cause most rejects), and warehousing (a few SKUs generate most picks).
The practical use is focus: a Pareto chart of stockout causes or freight spend tells a team where one fix buys the most improvement, instead of spreading effort evenly across every cause.
Frequently Asked Questions
How is Pareto's law used in inventory management?
It justifies ABC classification: rank SKUs by annual usage value and split them into a small A class holding most of the value, a middle B class, and a long C tail. A items get frequent review, accurate counts, and tight service targets; C items run on simple automated min-max rules.
Is the 80/20 split exact?
No — it is a shape, not a constant. Real distributions come out 70/30, 90/10, or anywhere between; the point is that contribution is highly concentrated. Build the actual Pareto curve from your data and cut the classes where the curve and your management capacity suggest, not at a ritual 80/20.
Related Calculators
Related Terms
A method of segmenting inventory into classes by value or importance, typically with A items representing the small fraction of SKUs that drive most of the value. It focuses management attention where it matters most.
OutlierAn outlier is a data point that falls far outside the normal pattern of a series — such as a demand spike from a one-time bulk order — and can distort forecasts, safety stocks, and performance metrics if left untreated.
SKU RationalizationThe systematic review of the product portfolio to prune SKUs that add complexity without sufficient sales, margin, or strategic value. It reduces the long tail that consumes inventory, space, and planning effort.
Shingo's Seven WastesShingo's seven wastes are the categories of non-value-adding activity identified in the Toyota Production System — overproduction, waiting, transportation, overprocessing, inventory, motion, and defects — that lean improvement works to eliminate.