Why Manufacturers Should Focus on the ’80’

I recently read with interest the results of Sikich’s Industry Pulse Manufacturing and Distribution Survey for the first quarter of 2024. Sikich surveyed more than 100 manufacturing and distribution executives on their optimism, business challenges, and strategies for growth and operational efficiency. According to the Sikich Survey, 31% of respondents cited labor shortages/increased labor costs to be a top issue for manufacturers. In addition, 14% of respondents cite gaps in availability of skilled labor as an issue. Despite these challenges, business leaders are still prioritizing growth but are doing so conservatively. Manufacturing executives are focused on existing products in current markets, with 40% of respondents citing market penetration as their primary growth strategy.

More broadly, Michael Weidokal, Executive Director of ISA recently presented a long-term perspective on the factors affecting the global economy and impediments to growth. These include geopolitical tensions, changing demographics, labor shortages, and resource scarcity.

Both the Sikich Survey and the ISA report point to some of the same factors posing risks to businesses and suggest similar recommended actions:

• Labor shortages and shifting working patterns impacted by changing demographics, a shrinking of the working-age population, and the propensity for remote work caused by several factors.
• Shrinking skilled labor pools due to retirements and an aging population.
• Persistent inflation and higher interest rates are driving material, labor, capital, and other resource costs upward.
• A recommended focus of resources on key manufacturing markets, existing products, and market penetration as the best path to pursue opportunities for growth.

80/20 Principle

At the last firm where I worked, a key element of our business strategy was the application of the 80/20 Principle. The basic tenet of this principle is that 80% of the value yielded (outcomes) from your business activities comes from 20% of the engaged activities (inputs). Some simple illustrations we used to drive this point home during training sessions, of which all associates participated:

• You wear 20% of the clothes in your closet 80% of the time.
• You eat 20% of the food in your fridge 80% of the time.
• You watch 20% of the channels available on your TV 80% of the time.

At least every two years each business unit reviewed all products, listed from highest to lowest sales, and drew a line below those products listed that constituted 80% of revenue. This would invariably be 20% of the business unit’s products. Similar analyses were performed for products from highest-to-lowest margin and customers by highest-to-lowest sales. This exercise would invariably lead to the same 80/20 result. In this way, each business unit would identify their “80” and would then be challenged to focus resources on those products, customers and markets that provided the best opportunities for profitability and growth. Not only labor, but scarce critical overhead resources such as engineering, sales, marketing, and customer support would then be re-allocated to those products and customers that presented the greatest potential for profitability and growth.

Focusing on the 80

What impressed me most about this process was the willingness of business unit leadership to de-emphasize, rethink, and implement simplified business models for, and in some cases walk away from, low-yield products and customers. They would willingly take the immediate hit to revenue in the near term with the confidence that it would lead to improved profitability and growth in the longer term. This would be reflected in their forward-looking 5-year plans. 

Conversely, I once was with a manufacturing firm that had global market dominance in an emerging high-tech space faced with tremendous growth opportunities. Rather than focusing on the “80,” they spread resources across multiple product designs and operating systems to satisfy niches in multiple markets. Profits were short-lived, engineering resources were wasted, and they lost sight of where the technology and markets were going until it was too late to recapture what was lost.

To borrow a phrase from a colleague, insightful organizations capitalize on opportunities to “future-proof” their businesses. They anticipate the future and plan and execute accordingly. They focus on and continually evaluate the resources, health, and profitability of their core capabilities, existing products, and key markets. That’s one piece of a strategy that can ensure a strong operational foundation for the profitability and cash flow needed to pursue growth opportunities in uncertain times.