Understanding the 80/20 Rule in Purchasing
On occasion, we conduct culinary and hospitality school tours on property. Beyond the basics of showing students the operation, we also take advantage of the teaching moments we have.
In school, students will spend countless hours learning operations based on the ideal scenario. A great example of this would be in the receiving area of the hotel. The textbook may say that every item on a single delivery should be weighed, counted, and verified. However, this does not take into consideration the realities of limited dock space, no street parking, ticket-happy parking enforcement officers, impatient drivers, multiple deliveries happening at one time, unscrupulous vendors, chefs needing their products right away, the labor hours needed per delivery, and in some cases the limited resources provided to the receiving team to do their job.
A seasoned receiving team understand their limitations. They learn how to organize their day to achieve maximum efficiency given their working scenario. Purchasing teams are no different.
According to the textbook, every single purchase should involve some form of multiple RFQs (request for quotes) and/or some type of bidding process. The limited number of hours in the day do not always allow for this. Tasked with similar scenarios as a receiving team, a seasoned purchasing team will also learn to maximize their efficiency by focusing on the items that greatly impact the operation when it comes to controlling costs. One of these ways is by subscribing to my favorite rule: The 80/20 Rule.
The rule says that 80 percent of the effort is focused on 20 percent of the most impactful areas of your operation. A great example in Purchasing would be, 80 percent of the dollars you spend in your operation going to the top 20 percent of the items you consume. Another one would be putting 80 percent of your time into the top 20 percent of job functions that create an ROI for the operation. If you are looking to increase cost savings, 80 percent of your efforts should be focused on the top 20 percent of items you buy. The textbook dictates that we should focus on everything. This might sound good in the perfect world, but no purchasing team has the time and resources for this. If your purchasing team does have the time for this you may want to review the staffing levels in the purchasing office.
One of the rules I also live by is not “Spending Dollars to Save Pennies.” This means that we could focus on saving money on the bottom 20 percent of our total spend. The reality to do so could mean that we are spending more on the effort than the savings will ever yield. The textbook shows us how the ideal operation “should” run. Some of the limitations mentioned above detract from this. Our job, regardless of the area we work in, is to maximize our efforts to achieve the greatest return for the operation.
Until next time…