Using The Pareto Principle In Your Trucking Company
The Pareto Principle is named after the Italian economist Vilfredo Pareto in the early 1900’s, but we are more familiar with it as the 80/20 rule.
Although not scientific the principle suggests that roughly 80% of effects come from 20% of causes. Apparently Pareto noticed 20% of the pea pods in his garden provided 80% of the peas. He also determined that 80% of the land in Italy was owned by 20% of the population. He carried out surveys and found that a similar land distribution applied in other countries also.
The 80/20 rule doesn’t just apply to gardening or real estate, it is everywhere. In health care in the United States, there was an instance where 20% of patients have been found to use 80% of health care resources. Again in the US, the top 20% of earners have paid roughly 80-90% of Federal income taxes in 2000, 2006 and again in 2018.
Microsoft noted that by fixing the top 20% of the most-reported bugs, 80% of the related errors and crashes in a given system would be eliminated.
One study found 80% of crimes are committed by 20% of criminals while 20% of drivers are responsible for 80% of accidents.
When video rentals were all the rage many shops reported that 80% of revenue came from 20% of videotapes. Stores had to offer classics like Gone with the Wind, Casablanca, or The African Queen even if customers very rarely rented them.
How can the 80/20 rule be applied in your trucking company? By using the 80/20 rule as a guide line it can easily be determined where you should focus more attention to drive business and also improve weaker areas in the organization. For instance, take a look at your employees, 20% of them are carrying 80% of the workload. Although this is an expensive observation, it gives you an opportunity to remedy the situation and help make the 80% more productive.
In this scenario the 80% may not be intentionally goldbricking on company time they just need a little motivation. More job training or even re-assignment to another position that holds more interest for them could make a world of difference.
Conducting informal individual chats with members of the 80% will uncover reasons for their lack of motivation and allow you implement subtle changes. If the company only realizes a small increase in the total production from the 80% it could mean a massive increase to the bottom line.
The Pareto principle is often associated with sales to estimate that 20% of the clients generate 80% of the company revenue. Likewise, 20% of the sales force bring in 80% of the business. In these scenarios it might be advantageous to put more attention on the 20% to support the sales force and help retain accounts, and acquire new clients with similar characteristics.
But there is probably a downside to the top 20% of clients. It appears that the larger the client the slower they are to pay freight invoices. They are more likely to take 30, 60 or 90 days to settle accounts than your smaller clients.
A quick evaluation of your current and past receivables client by client will identify the really slow payers. You will also come to conclusion that the 20% are creating 80% of your overall cash flow problems.
As cash flow is the diesel fuel of your operation, without it the company can grind to a halt. What can be done to improve the cash flow situation so you aren’t stuck between a rock and a hard place?
Let’s assume for a moment I am the Accounting Manager at one of your larger clients. One of my tasks is to hold on to my company’s cash. That means stalling payment to vendors like your trucking company for as long as possible.
I would ignore “past due” and “final” notices and wouldn’t even process payment until receiving a telephone call. Even then I would have a string of reasons to delay payment further. These reasons include your invoice was never received, the bookkeeper is out sick, our accounting software program crashed, the check signer is out of town, the check went out last week so will have to put a stop-payment on it, the check is being processed, payment is going out next week, or my dog ate the check!
As the Accounting Manager you and I both know these are not reasons but lame excuses to keep your cash in my pocket.
If the vendor is overly persistent about getting paid before I am ready to cut a check I would play my ace card. That ace would to be a threat to change vendors. That’s usually enough to stop chasing payment because nobody in the vendor’s accounting department wants to be responsible for losing a valuable client.
The bottom line is you know that the client is financially stable and will pay….eventually. Unfortunately while your money still resides in the client’s bank account your current trucking company bills are left unpaid.
The best solution is to factor your account receivables, There are different types of factoring for trucking companies that convert receivables into cash in your bank account within 24 hours. This immediately improves your cash flow and eliminates worry and waiting for client payment.
Now the 20% of clients represent 80% of your positive cash flow rather than 80% of receivables!