The 80-20 Rule

As the first year of the new millennium begins, it is appropriate for retail jewelers and jewelry manufacturers to remember some of the things we’ve learned in the century just concluded. One such practical tool for jewelers on both sides of the counter is the “80-20 rule.” I believe it was an industrial engineer who developed the 80-20 theory-that is, 80% of a business’s sales come from 20% of the product offered. By itself, the 80-20 rule is interesting and helpful whether you are a retailer, wholesaler, or manufacturer. However, comparing those 80-20 products with your inventory investment is what really pays off in profitability analysis.

Every business needs to capture its sales data to measure where its business originates and to compare these data with prior years’ activity to measure changes. It’s a simple concept, but one that can be overlooked as we become more sophisticated. The analysis is our scorecard on how we have performed in interpreting the needs of our customers. This comparison of sales to inventory investment tells the real story of our management ability. It is here that we see how well we have bought, designed, or manufactured products to satisfy our customers.

Recently, I had the opportunity of meeting once again with Abe Sherman, formerly of Sherman Jewelers in Flemington, N.J. Deciding that his temperament was better suited to teaching his principles of retailing than actually operating a retail business, Abe joined Joe Romano’s Scull & Company as executive director of a new business segment called Buyers International Group (B.I.G.). Just recently, he acquired B.I.G. from Scull and now operates it as a separate consulting enterprise.

While still in the retail business, Abe had successfully implemented merchandise plans based on his customers’ product preferences. He developed an inventory control system that reflected his store’s inventory investment plan, which was predicated on the 80-20 rule. During the past few years, Abe has been helping retail clients implement this method. He’s taken it one step further by working with manufacturers to create programs that reflect this 80-20 analysis. He will be a featured speaker on this topic at the 2001 JCK Show in Las Vegas.

The retail jewelry business is divided almost equally between the majors and the independent retail jewelers. During the past five to 10 years, according to the Jewelers Board of Trade, the total number of retail jewelers has been declining. I’ll bet many of the retail jewelers who went out of business did so because they had a significant imbalance in their inventory relative to their sales. Simply stated, they had plenty of stuff consumers did not want, and not enough of the merchandise that sold day after day.

In a meeting with Joe Bernstein, a former senior vice president for Kay Jewelers, Joe put a fine point on the 80-20 rule and on meeting customers’ needs. Joe is a strong believer in the 80-20 rule, so much so that during the meeting he showed me a sales report of the top 200 items in Kay’s assortment plan. He explained that one of the primary responsibilities of Kay’s area supervisors was to make certain that each one of those top 200 items was in stock at all times in every store under his or her control. A store manager who ran out of any of these items was in real trouble.

Take the time now to do the analysis that will keep your business stocked with your top-selling SKUs, or the items that represent 80% of your business. It’s one investment that will help keep you-and your business-out of trouble.