Why Procurement Pros Should Love the 80/20 Rule

How to deploy the 80/20 Rule into your Procurement Work Today

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.

Mental Models & Skills

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

Supplier Segmentation and Management:

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:

• Spend

• Credit Risk

• Cyber Risk