Value Analysis (VA): Using the Pareto Principle in Inventory Allocation during OTC Back-logs

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“We need a solution to this situation & we need it like yesterday, period. Resolve this matter urgently & give it top priority please. I can’t stress the importance any further than the backlogs that are worsening every shift.”

That booming voice coming thru the teleconferencing phone-line, belonged to the Global BU EVP at WWHQ. The room was filled with demand planners, logistics & transportation personnel (including shipping planners & a handful of the contracted logistics folks), customer service & order management teams, after-sales Field Quality Engineers (FQEs), & joining the foray as the direct reporting personnel to the Global BU EVP – yep, little old me.

The phone cut off as the EVP signed off with curt goodbyes around the room. I’d looked around, feeling the niggling sensation of a creeping problem that would blow out of proportion, with endless customers’ orders backing up & naturally, infinite complaints from all channels, sifting into my e-mail’s inbox. My eyes tuned to the drooping heads & honed in onto the ashen face of the Customer Services (CS) Director, & switching instantly to the Sales Director. Both of them looked as if they’d just completed the Boston Marathon & rushed into the meeting without a shower – red & sweaty lobsters. The Suppliers’ Development Team (SDT) at Contract Manufacturing (CM) had indicated bubbling problems with Quality Acceptance Rates (QARs) dropping steadily & the various compliance problems that swelled up with several of the major contract manufacturers (CMs); from product licensing & factory re-certifications, including BoM mis-matching (the main causation of the declining QARs). We could hear a pin drop & reverberate its echo as it bounces on the carpet as I’d calmly told everyone to return to their workstations & await a further next Point-of-Action (PoA) e-mail from me to their divisions’ heads. The CS & Sales Director took that hint that I’d needed the both of them in the room – sigh…years of working together, our collaborative mentality is almost telekinetic.

value analysis pareto“We need to re-position our allocations from the CMs & internal lines, fulfilling orders that are urgent to prevent line shut-downs at our customers” I’d said.

The CS & Sales Director began their tussle almost immediately – who’s the top paying clients, who’s buying & credit limits are ceilinged or at floor levels, who’s nearer or further at which destinations, who’s buying the most multi-SKUs, etc. It went on for the next 15 minutes or so, with my mind floating around in a haze until I’d decided to snap them both out of the argument & decided on:

Value Analysis Using Old Pareto’s 80/20 Rule

“Let’s go with allocating ONLY 80% of stock-to-orders for the top 20% buyers, but only after their limits & terms have met eligibility.” Both the CS & Sales Director went silent with their mouths shaped in an O.

“Hang on! I’ve heard of allocating any AVAILABLE stock to 20% of the company’s VIP spenders with us, but…allocating ONLY 80% of AVAILABLE stock to 20% of the VIPs?” the Sales Director exclaimed.

The requirements were simple:

  1. We will post-goods-issue (PGI) orders for FCA / DDU / DDP / CoD terms immediately, but subjected to CS re-affirming & re-adjusting planned orders down to 80% of the volumes ordered. All pre-qualified top 20% buyers will get 80% of their order volumes delivered & Sales will re-work all forecast demands with the buyers & end-users for the next Sales & Distribution (SD) pull.
  2. All ex-Works terms must enact pick-ups within 24 hours upon order confirmation. If the TEUs / FEUs did not appear at our staging areas for stuffing within 24 hours, stock-at-hand will be re-allocated to the next buyer in queue. The same pre-qualifying restrictions will apply – 1st come, 1st served basis.
  3. Balance of stock leftover will be re-counted back into inventory for the next re-allocation. This method is to counteract shortfalls on the following month’s cycle counts, due to CMs’ backlogs. This will also buy SDT a little bit more time to work with the CMs in pushing out higher quality SKUs &/or rectify BoM discrepancies in detail. A little bit more time to ensure the CMs obtain re-certifications &/or license too! I can’t foresee early push-outs from the CMs, but I do know that if we don’t start nipping the problems at the front-end, the backlogs won’t be just orders clogging, for sure. The ramifications would entail RMAs occurring from all ends & corners of the globe, plus the After-Sales FQEs would definitely have a field day! Forgive me – no puns intended.
  4. All assembly lines’ shifts will remain intact (3×8 turns) with the exception of the warehouses & distribution centers (DCs), whereby I’d deliberately shifted the 2×8 turns to 2×10 instead, with a lowered head-count on the 2nd turn. I’m not allowing any clogging to occur at the staging areas due to late cut-offs, & to ensure TEUs / FEUs arriving for stuffing & pick-ups will be executed immediately.
  5. All Vendor-Managed-Inventory (VMIs) refreshers (or replenishments) were to be temporarily suspended if the VMI stock levels were still adequate at 50% volumes or above, across all SKUs. The top-up replenishment will only go to a maximum of 50% if the volumes fell below that threshold.

“Sigh…will it work?” both the CS & Sales Directors asked impatiently.

I was very quiet & still…crossing my fingers under the table & praying under my breath that the problems would be resolved as I bought time for SDT & the CMs. Looking back now, it had been a decade (or more) ago when this situation occurred, in Y2002. It was a breath of relief (tears of joy for many, too) when the problems were resolved within quarter-1 (Q1) & quarter-2 (Q2), plus taking almost whole of quarter-3 (Q3). The 9 solid months of sweat & toil, plus endless collaboration from every partners contributing in the value chain (the people & talents – both internal & external) sacrificing time & putting aside differences in a common goal; was significantly an eye-opener & many professional relationships were strengthened with the CMs & Logistics Service Providers (LSPs) eventually.

The turning point wasn’t just collaboration & harmony in thoughts & skill-sets; the key was that there was a STRATEGY – a PLAN that was carried out, without leaving any I’s un-dotted or T’s un-crossed. It could have failed, badly…but no, it succeeded instead. I do continue to use the same Pareto Principle in any given circumstance, not necessarily in difficult situations but also within any macro &/or micro circumstances; although the SoPs have changed & differed with the advancement of ERPs / MRPs / SCM concepts etc.

Oh…I still thank Vilfredo Pareto in my mind, now & then…

In January 2020, Cerasis was acquired by GlobalTranz, a leading technology and multimodal 3PL solutions provider. To learn more, please read the press release. If you are a current or prospective Cerasis customer, we invite you to reach out to us to learn how our combined capabilities can deliver new services, solutions and enhanced value to your supply chain. To learn more about GlobalTranz, please visit

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