80 vs. 20 (80/20)
80% of a company’s revenue comes from 20% of its customer and product base, yet absorbs only 20% of its overhead cost. As such, “80/20” says to treat the 80s (the critical few) differently and much better than the 20s (the much less significant many), and organize the business in this way to maximize profitable share gain.
80/20 Pricing (Incremental Pricing)
A powerful way to win large customer business once the true costs are understood. Often, we fail to accept large customer business because we believe the margins are too low. Incremental pricing asks that we look only at what costs are incremental if we accept the business at the winning price. Often, the material margin percentage is equal to the op margin percentage, making this large volume business very attractive and easier to win than believed.
“A” vs. “B”
Merely another moniker for 80s (“As”) and 20s (“Bs).
Customer Line Simplification (CLS)
Same as product line simplification (PLS), it must be done, but not as critical. Small customers who buy long-run standard items are acceptable. Small customers who buy short-run special items are not. When in any doubt, however, eliminate small customers.
Contribution Margin
Revenue minus all variable costs, where variable costs are material costs and direct labor costs.
Go West
Quads are prepared with Quad 1 in the upper left, and Quad 2 to its immediate right. A key strategy is to get our Quad 2 customers to buy standard as much as possible. This takes time, but when successful, the value of moving business from Quad 2 to Quad 1 is great. This act of going from Quad 2 to Quad 1 is, in the quad chart, the act of “going west.”
Incrementals/Decrementals
A financial technique to measure the value of growth, or the cost of shrinkage. If, for example, growth of $1M generates $100K of extra profit, the incremental profit on the growth is 10%.
Jumping-Off Point (JOP)
When tracking progress over time, it is helpful to know exactly where we began—the “jumping-off point.”
Key Ratio
Material Margin Dollars/Total Employee Cost Dollars (salary, fringe, bonus, temp, OT, etc.). A simple measure for checking how well a company leverages labor cost, usually calculated quarter by quarter. Its immunity to material cost fluctuations make it powerful. 3.0 and above is a good target.
Magnificent 7 (Mag 7)
Techniques used to provide customers with a “soft landing” while reducing the product line. For products being eliminated, we can price them higher, provide minimum quantities only, limit numbers of runs annually, combine like products into single options, etc. Seven such techniques exist.
Market Rate Of Demand (MRD)
After we’ve simplified, segmented and streamline our business MRD leverages historical demand data to help determine how to size our production capabilities with a demand-driven, variable mindset. In general, we size our production capabilities based on 80% of our historical demand patterns +/- any KNOWN, factual changes (e.g., an increased auto production build rate on select platforms on which our products are qualified). This tool sizes our production capabilities on factual data versus what we hope is going to happen and ultimately elevates service levels for our highest volume products and customers.
Material Margin
Also known as “value add,” this is revenue minus material cost only.
Model Cell
The most efficient and powerful way to move a company to world-class performance. The idea is not to continually try to get a bit better everywhere, but to get absolutely perfect in one cell very quickly to demonstrate to the culture what perfect looks like and that we can achieve it. Once understood, the rest of the organization seizes upon the vision and rapidly mimics it.
One Thing
The concept and value of simplifying one’s workload by focusing on the one most important task. Defined with help from the focusing question: What’s the ONE thing I can do to make everything easier or unnecessary?
One to Perfect (1:Perfect)
It’s essential that our top customers’ metrics (QDC, or ISOTIF—in spec, on time, in full) are perfect, even at the expense of many of our smaller customers. One to Perfect
is an initiative usually used early in 80/20 transformations that focuses the company on getting ONE customer (usually, customer #1) to a perfect metric status no matter what. The speed at which this can be accomplished and the value received from the client is culturally transformative.
Product Line Simplification (PLS)
Unarguably the most essential part of 80/20 and company improvement. Unregulated product proliferation can’t be overcome by efficiency measures, and paradoxically, too many choices for the market makes it more difficult for customers to choose.
Quad
A more strategic look than quartile analysis. Breaks each transaction into four categories: Quad 1 (80 customers buying 80 products), Quad 2 (80s buying 20s), Quad 3 (20s buying 80s), and Quad 4 (20s buying 20s). Makes clear the specific strategies for each quad, and allows rapid execution of each strategy knowing the risk and reward in each quad.
Quartile
A method of analysis to assess complexity. Simply put, stack rank customers and then products from top to bottom by annual revenue. Divide the list into four equal “quartiles” (100 customers will have 25 customers per quartile), and see how much revenue is contained in each. For companies that have not been through 80/20, the quartile revenues will be 89%, 7%, 3%, 1%, by customer or SKU.
R40
Current profitability percentage + growth percentage (current period versus previous period). Should be 40 or above. An excellent measure to ensure the company balances focus on both growth and profitability.
Segment
The true value of 80/20 is the ability to economically structure ourselves into market-focused, self-contained business units. Non-80/20 businesses would love to be so nichey but can’t afford the overhead. 80/20 businesses, after PLS and CLS, can “zero up” and do so. Allows us to win, niche by niche, with excellent margins that we truly understand.
Segment GM Role
An extremely powerful “hidden asset” of 80/20. The creation of multiple niche businesses creates a number of opportunities for people to become “mini GMs” and run their own business far earlier than they otherwise might. This creation of outstanding business leaders allows for much more rapid organic and inorganic growth, as we’re able to plug in experienced 80/20 practitioners into newly created segments, and new acquisitions.
Segmentation
The process and mindset of breaking a given business into its unique business
lines, typically smaller, more focused and manageable parts of the business (e.g., end market, channel, product type to name a few) which have unique requirements, value propositions, growth objectives, etc. that lead to distinctly different resource allocation needs across the segments.
Smart Sharing
While we work to minimize any shared resources, in some select areas it will make sense to have a single resource supporting multiple segments (e.g., financial controller, IT leader of the business). We would consider sharing these resources across segments to be “smart sharing.” Generally the exception to the rule of dedicating resources where needed to deliver specific business objectives.
Target Selling
The art of defeating the competition at large customers by assigning overwhelming resources and focus on those few large customers at the expense of the small many. The goal is not to have the most customers, but to have all of the most valuable ones.
Trade Focus
The art of creating and testing a 4P (price, product, promotion, place) plan for market penetration/growth in a very limited area we can focus on heavily before we invest completely in large scale rollouts. The ability to PDCA quickly, and ramp up efficiently, makes this method of organic growth extremely cost-effective and powerful.
USa
An acronym for Understand, Simplify and then automate — and in that order when evaluating and improving business processes. Too often we move to automate when in reality, that’s only possible for well-defined, in control and value-added processes (thus emphasis on Understanding and Simplifying prior to automating).
Variable Margin
In some cases, the same as contribution margin. Sometimes calculated to include variable period costs such as oils, sandpapers, etc that get consumed as products are produced.
Whale
The best of our Quad 1 accounts, and those competitive accounts we target since, when we win them, become among the best of our Quad 1 accounts. Our goal is win, and keep whales.
Zero Up
A technique for establishing the pure profitability of small subsets of customers and aligning appropriate levels of labor to them. Usually, start with zero customers, zero labor, and zero facilities, then add the #1 customer, add only the labor and facilities essential to serve them well, do a P&L. Then add the #2 customer and keep going.