The Procurement Glossary » Pareto Principle (80/20 Rule)

Pareto Principle (80/20 Rule)

Inventory & Logistics

Definition

The observation that roughly 80% of effects come from 20% of causes — e.g. 80% of spend from 20% of suppliers.

Explanation

The 80/20 rule guides prioritisation across procurement: focus on the vital few suppliers, items or categories that drive most value or risk, and manage the trivial many efficiently. It underlies ABC analysis and tail-spend thinking.

Example

Because 20% of suppliers cover 80% of spend, the team focuses sourcing effort there first.

Related terms

• ABC Analysis — A method of classifying inventory or spend into A, B and C groups by value, so effort is focused on the most important.
• Tail Spend — The large number of low-value transactions and suppliers that together make up a small share of total spend but a big share of effort.
• Category Management — Managing related groups of spend as strategic business units, each with a tailored strategy and dedicated ownership.
• Supplier Segmentation — Grouping suppliers by importance and risk so management effort is focused where it delivers most value.

Frequently Asked Questions

What is Pareto Principle (80/20 Rule)?

The observation that roughly 80% of effects come from 20% of causes — e.g. 80% of spend from 20% of suppliers. The 80/20 rule guides prioritisation across procurement: focus on the vital few suppliers, items or categories that drive most value or risk, and manage the trivial many efficiently. It underlies ABC analysis and tail-spend thinking.

Can you give an example of Pareto Principle (80/20 Rule)?

Because 20% of suppliers cover 80% of spend, the team focuses sourcing effort there first.

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