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8020 Principle

rbmgf7

Aluminum
Joined
Oct 18, 2017
Since this place seems like it caters to mostly job shop environments, I have a question.

Does anyone here use the 8020 principle for their business?

I'm in a corporate environment where we have divisions and facilities that do high production (all pretty much are overseas) but through numerous acquisitions over the past few decades, our facility has become the catch-all for a lot of onsie-twosie products. We're literally a job shop where if a customer can't get a stock product of ours, they can have one custom made by either having a redesign/mod to something existing to literally a custom made product.

Well, the way this company is structured, our facility has zero ability to control our designs, investments, budgeting/capital, BOMs, costing, some sourcing, etc. Most of it is controlled elsewhere. All we can do is build what we're given. Therefore, it makes it extremely difficult to make adjustments and countermeasures quickly and efficiently. Everything has to go through the bureaucracy gauntlet. Most of the time, we're selling custom made products below cost, even negative while a few high-dollar accounts bring us back into the black (but barely). The real problem is the "higher ups" don't seem like they want to capture all of our costs. I guess it's to help keep the cost of the product low so we can still be "competitive" and not lose accounts. Since we're changing over setups, materials, etc. (like a job shop), they feel like we only need to only capture direct (like a high production facility) while we hemorrhage in indirect. New CEO exclaimed he wants 35% GP. Being a job shop, shouldn't that be achievable? The other thing is, while we're in last place in the market, we're the only company/facility that has this ability to custom make the product with relative volume. Our competitors have gone to a mod shop idea where they have the stock products made overseas then it comes to a domestic facility where it has the ability to be modified to the customers liking (but with some limitations).

Well, to help fix this, the highers feel like 8020 would be a good practice to implement where they want to ditch 80% of our lower paying customers (supposedly 20M in sales).

Seems counterintuitive to me if we're losing money because we're not capturing costs appropriately, voluntarily getting rid of customers is the way to become profitable? If you can imagine the numbers (and this is a rough example), a stock product might cost $500. We're selling a custom product for $600 but if you capture everything that goes into it, you can imagine it actually costing $1500. Then 8020 wouldn't be necessary, right? Because either the customer will pay and we actually make money or the customer will pass and we won't lose nearly as much if we were to continue the job.

I honestly don't get it but these guys have the MBAs so that means they know how to run a business, right?
 

Booze Daily

Titanium
Joined
Sep 18, 2015
Location
Ohio
I think this is the newest megacorp buzzword. My wife works in marketing for a global company and they are doing the same thing. Ditch the low volume customers and focus on the high volume ones.
Makes no sense to me.
 

Phil in Montana

Stainless
Joined
Jul 31, 2007
Location
Missoula Mt
Reyerson Steel done this 35 years ago, forgot about all the little guys. 80% drop in sells, they could not buy steel at the price they once did, there inventory dropped where the big guys would not buy from them nether. In the end the 80/20 was dropped the sales manger was fired, and they went back to the old sales model. The sales never did come back to the old levels. I for one will never buy from them, they are not on my quote list and never will be...Phil
 

rbmgf7

Aluminum
Joined
Oct 18, 2017
I think this is the newest megacorp buzzword. My wife works in marketing for a global company and they are doing the same thing. Ditch the low volume customers and focus on the high volume ones.
Makes no sense to me.

To make the situation hilarious, when our division leader came down to present this new concept, he led the meeting with this phrase:

"I'm glad to announce we're changing our business strategy...I read about it in a book...it's called 8020."

Yup, kid you not.

But yes, it does seem like the new buzzword. Especially since this company was staffed by a lot of Golf.Echo. management after they went belly-up (current company bought a division of the other one). So you can imagine SixSigma and Lean was super popular for the longest time until the recent change in regime. Now, not a blip on the radar.
 

Mark Rand

Diamond
Joined
Jul 9, 2007
Location
UK Rugby Warwickshire
Certainly seems like the facility should be allowed to quote the expected true price of the product to the sales folk before the sale is made. If it's too high, the customer walks. If too many walk, the facility isn't viable, if they stay and pay the true price, the facility is golden.

I never understood business though...
 

DDoug

Diamond
Joined
Oct 18, 2005
Location
NW Pa
Certainly seems like the facility should be allowed to quote the expected true price of the product to the sales folk before the sale is made. If it's too high, the customer walks. If too many walk, the facility isn't viable, if they stay and pay the true price, the facility is golden.

I never understood business though...

BUT....if the loss parts are a small fraction of the total that a large customer purchases from them, will dropping the non-profitable (or cranking up prices greatly) lose that total account from said customer ?
 

DDoug

Diamond
Joined
Oct 18, 2005
Location
NW Pa
To make the situation hilarious, when our division leader came down to present this new concept, he led the meeting with this phrase:

"I'm glad to announce we're changing our business strategy...I read about it in a book...it's called 8020."

Yup, kid you not.

But yes, it does seem like the new buzzword. Especially since this company was staffed by a lot of Golf.Echo. management after they went belly-up (current company bought a division of the other one). So you can imagine SixSigma and Lean was super popular for the longest time until the recent change in regime. Now, not a blip on the radar.

Have a piece of this in your hand when he talks to you about "8020"...:nutter:
80/20 T-slot Aluminum Building System
 

BoxcarPete

Stainless
Joined
Nov 30, 2018
Location
Michigan, USA
Something like this happened with our biggest customer a while back. They went to re-source the #1 part they buy after we gave them a cost increase to stay profitable. They found another source and told us they were going to do it if we went through with the cost increase. We replied back a LONG list of small-volume crap that they also buy and their "true" cost that they would otherwise have to pay if they weren't such a good customer to us who buys these other high-volume parts. They accepted the cost increase on the big one.

Now that I look at it again, that's exactly the opposite of your situation. Maybe you should do the opposite thing then? :scratchchin:
 

toolsteel

Titanium
Joined
Nov 9, 2012
Location
NW Wisconsin (BFE)
BUT....if the loss parts are a small fraction of the total that a large customer purchases from them, will dropping the non-profitable (or cranking up prices greatly) lose that total account from said customer ?

Not gonna pretend to understand everything that goes into some of these decisions. I will say that the company I work for has some products that are sold at a break even price or even at a loss. They embrace the idea that if a customer has 15 items they want to buy and we only offer the 10 items that we can make money producing, the customer has a big incentive to go elsewhere for the whole order (as you said). I understand the logic. That being said...occasionally they will come out with a new policy or some business decision that I think is crap and I usually try to convince myself that I dont neccesarily have all the info in front of me that those making the decision do. My long range goals for the company arent neccesarily what the owners goal is.
Hell, its possible they have their sights set on a new product line and need to "make room" for it...or they could be eyeballing a different shop to buy that could make $ on that low margin stuff....who knows
Then again...they could be pretenders floundering around accidentally making money in spite of stupid decisions....either way ...not much i can do about it other than cash every check.
 
Joined
Apr 14, 2018
Location
Airstrip One, Oceania
It's called the Pareto Principle, it's been around for decades, these stupid bastards can't even keep current on their braindead buzzwords.

And it's the reason China has most of the work now. Also 10,000 miles of 200 mph trains, numerous new subways per city, countless new thirty-story buildings, a rising standard of living, better health care, higher incomes, and tons of other desirable features -- because you didn't want the "low profit" work.

MBA's are morons.
 

CITIZEN F16

Titanium
Joined
May 2, 2021
Garbage like this and people wonder why some of us would rather die broke working till the day we drop for ourselves than work for a large company staffed with MBAs, spewing management buzzwords and trying the latest management system fads. Most MBAs I was around in days gone by had zero common sense. How did they come up with 80-20, did someone pick numbers out of a hat?
 
Joined
Apr 14, 2018
Location
Airstrip One, Oceania
How did they come up with 80-20, did someone pick numbers out of a hat?
Look up 'pareto principle', it's been around forever, like 100 years or more. MBA's and so-called economists just misapply it because they totally miss the point.

If they applied it to houses they'd get rid of the foundation and the roof and the plumbing because you really only use the walls and floor and ceiling and you only wash yourself maybe a half hour a day, let's get rid of it ! most of the house is a waste ! Concentrate on the important parts !

Talk about stupid :(
 

Bobw

Diamond
Joined
Feb 8, 2005
Location
Hatch, NM Chile capital of the WORLD
Doesn't make a lot of sense to me. So right now you drop all your small customers and take
on no new small customers. That may work NOW.. But what happens when some of those small
fish become big fish.. You've already told them to pound sand, they aren't going to come
knocking on your door.

Seems to me to be a very short sighted solution to a long term problem.

How did they come up with 80-20, did someone pick numbers out of a hat?

Apparently the 8020 thing applies to a ton of things.

If you're bored and sick of Everybody Loves Raymond.

 

HuFlungDung

Diamond
Joined
Jan 19, 2005
Location
Canada
The trouble with the 8020 principle is that paying the costs takes 80% and the profit lies in the 20% part. So you gotta do 100% to make a profit.
 

FJsapper

Aluminum
Joined
Nov 18, 2020
Location
Sterling Heights, MI
I am no business expert...but it seems like a bad idea to not fully assign direct/indirect costs per unit. Yeah maybe from a loss leader kind of approach but that should be really minimal and on a per-customer basis right?? Isnt generating revenue what its all about? If you cut all those little fish then you are cutting revenue and giving up market share. Seems like a bad plan...and bad financial sense.

I'm in an MBA program right now :eek:.... Nobody has brought this silliness up yet. Oh, i make my own coffee, change my own oil, and carry my own bags too.
 

Talinthon

Plastic
Joined
Mar 19, 2021
I failed the test on "How to Win Friends and Influence People".

I'd flat out ask the new division leader, and the CEO if he was present, how, exactly, the Pareto Principle would be applied when every ... single ... metric that is needed to determine where to cut is fixed in stone and controlled by some disinterested, arm's length third party who has no vested interest in seeing your plant succeed.
 








 
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