The ‘Tale’ of the Tail of the Spend

Published March 30, 2015

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The Pareto Principle was named after Vilfredo Pareto in 1896 when he found that 80 percent of the land in Italy was owned by 20 percent of the people, as it was in every country he visited. Extended, it has come to mean that 80 percent of a company’s output comes from 20 percent of the input. Therefore, companies who follow the Pareto Principle concentrate on that 20 percent and virtually ignore activities outside those parameters.

Now take a look at the MRO situation: 80 percent of the paperwork burden a company generates is created by just 6-10 percent of the company’s total yearly spend. That 6-10 percent excludes production and capital expenditures and is known as the indirect spend. MRO, as a part of the indirect, accounts for about 5 percent of the total company spend [when it can be defined and measured accurately, which is rare]. In other words, MRO is the “tail of the spend” and, as such, receives little consideration in the total scheme of things….The Pareto Principle reigns.