By Rich Rovito, WMEP Industry Reporter
American Laser Products Inc. in Middleton turned to the 80/20 principle to change the fortunes of the company.
The phenomenon that has become known as the 80/20, or Pareto principle, has practical application in the business world and can be used to drive profit.
In 1906, Italian economist Vilfredo Pareto observed that 80 percent of the land in Italy was owned by 20 percent of the population. He began to look for this pattern in other areas and found it, even observing that 20 percent of the pea pods in his garden contained 80 percent of the peas.
Bill Henry, president and owner of American Laser Products, which manufactures monochrome and color laser printer toner cartridges, attributes much of American Laser’s success to the implementation and utilization of 80/20 principles combined with the workings of lean manufacturing and Six Sigma.
“It’s a powerful program. It’s a common sense program,” Henry said at a recent Lunch & Learn session in Madison presented by the Wisconsin Manufacturing Extension Partnership. “It really has turned the ship around.”
American Laser turned to 80/20 in 2010.
Valerie Laufenberg, a certified public accountant and strategic advisor with the Smith & Gesteland LLP in Middleton, warned those who attended the Lunch & Learn session that companies often don’t focus on the profitable 20 percent of their key customers or products. Instead, their attention is on the less important but larger 80 percent.
“I’m telling you, 80/20 can change your life,” Laufenberg said.
The program is counterintuitive to the way most people think, Laufenberg and Henry stressed. Most small businesses think that in order to grow they need more customers and products.
“Nobody likes change,” Henry said.“The key is to get the commitment from people.”
Prior to implementing 80/20, American Laser had 750 products and 500 customers. Annual sales stood at about $7 million and the company wasn’t recording a profit. Eight months after embracing 80/20, the company had reduced the number of products it offered to 250 and the customer base had been sliced to 70. Meanwhile, annual sales rose to $11 million and the company recorded a profit of $750,000 over the eight-month period.
Implementing a program encompassing the principles of 80/20 isn’t all about cutting customers and products, Laufenberg said. She used a gardening analogy to get her point across.
“In business we have too many weeds surrounding the healthy plants and we don’t have time to nurture the healthy plants,” she said.
Laufenberg suggested that manufacturers run a quartile report on its customers. This can be done by listing sales by customer and sales by products. Customers with whom a company has done the most business should be at the top of the list. Customers that fall into the first quadrant represent the “fort” for the company, and should be deemed the most important. Second quadrant customers are deemed necessary but not desirable, while those in quadrant three are considered “transactional.” Customers in the fourth quadrant should be eliminated.
“You’re best customers ought to be raving fans,” Laufenberg said.
Small customers often demand a lot of time and attention, which can take away from the attention that needs to be paid to larger customers, Laufenberg said. She stressed a need to simplify customers, products and processes.
Resources should be dedicated to top customers, she said.
Henry spoke of the challenge that comes with weeding out the small customers.
“It got a little testy,” he said.
American Laser changed the way it handled calls from customers so that only top 20 percent of customers could actually speak to Henry, the company’s general manager or even customer service.
“It was a heck of a transition. It was very difficult,” he said.”But it’s worked out tremendously. We’ve reduced our products and the number of customers and we’ve increased our sales and improved profitability. We’ve shifted all of our emphasis to our top customers and they’ve given us more business in return.”