Why Procurement Pros Should Love the 80/20 Rule

The 80/20 principle, also known as the Pareto Principle, posits that approximately 80% of effects come from 20% of causes. The 80/20 principle can be used in procurement to focus on the 20% of suppliers that account for about 80% of your total procurement spend as an example but it has many more ways in which it can be deployed.

One point I always like to stress with the 80/20 principle is that it does not need an exact 80-20 ratio. You could have 93-7, and you’d still be deploying the Pareto Principle.

This is part of our Mental Models and Skills series for Procurement Professionals. I’m bullish on procurement pros like you becoming highly skilled generalists to dominate future procurement. Mental models are the methods you need to deploy to dominate.

Here are some ways you can use it within your procurement work.

Supplier segmentation is categorising your suppliers by their importance to your organisation. Good supplier segmentation considers strategic importance, risk, and innovation potential. Traditional segmentation methods are based on annual contract spend, risk profile, and the types of goods or services provided.

💡 More modern approaches also consider cyber and ESG in their segmentation models.

Could you identify the 20% of suppliers you have based on the critical factors in your ranking and foster deeper relationships with them? This effectively becomes the foundation for Supplier Relationship Management (SRM).

What’s clear is that your most important suppliers should make up 20% or less of your entire supply base. We’d likely push this to 1-10% of your supply base. Deploy the 80/20 to determine what is vital to you and then use that to score/evaluate your suppliers.

For example, I might consider the following when segmenting my suppliers:

Out of these, I want to figure out which ones carry the most weight. That will differ depending on where you sit but I’m going to take the view that we mainly buy software, so cyber risk, spend, and quality matter the most. Those three will be the key to segmenting the suppliers as Strategic, Important, or Transactional.

From there, we then need to make sure 1-20% of our suppliers (but I’ll add the point raised above; I’d keep this much lower) are strategic and ideally have most of our suppliers in important or transactional.

Why?

Because it’s likely going to be near on impossible to manage all of our suppliers if they are Strategic given the level of care.

This is a guiding principle only. I appreciate some sectors will skewer this, but your thinking around this principle should remain.

Once you’ve used the 80/20 principle to segment, it opens up many avenues for you.

Your efforts then primarily focus on those top 20% of suppliers, and you can use this rule to drill down into individual efforts with each, such as:

You get it.

Conducting a Pareto analysis means focusing on the small areas that will give you the most significant ROI. This might mean you focus on doing more of what’s working on; you focus on areas causing you the most pain.

What this does is shortcut the process of improvement.

And that’s why I always use this principle in every aspect of my life.

I’ve spent eight years primarily focused on improving underperforming procurement, supply chain, and contract management teams. All of my focus was in:

Typically, it always comes down to a few prevailing areas: people, processes, tech, suppliers, and whatever else.

But we need a way to filter, so I always opt for Pareto.