Pareto’s Law and the 80-20 Rule for the Warehouse

Deciding on the best storage media is key to efficient warehousing.

Warehouse management expert and author, Stuart Emmett defines a warehouse as “a planned space for the storage and handling of goods”.   So if he is right, how do you plan storage?  What tools do you use to determine the best storage media?  The 80-20 rule is a good place to start.

Often called Pareto’s law, the 80-20 rule is a valuable tool for analyzing the mix of products stored in your warehouse the storage media best suited to maximize space utilization.  The larger principle states:

• 80% of your volume comes from 20% of your products.

Further defined, the principle also states:

• 20% of your volume is made up of 80% of your products.

Putting this to use for warehousing requires drilling down into the detail of the principle.

• 80% of volume comes from 20% of SKUs (stock keeping units)
  • The top 10% of SKUs represents 50% of the warehouse’s volume.
  • The next 10% of SKUs represents 30% of the warehouse’s volume.
  • The next 80% of SKUs represents 20% of the warehouse’s volume.
    • 30% of SKUs represents 15% of the warehouse’s volume.
    • 50% of SKUs represents 5% of the warehouse’s volume.

Using this analysis tool on the product mix helps determine the appropriate storage media.  Let’s put it to work on a hypothetical warehouse.  In this warehouse, there is the following product mix.

Scenario 1

• 1,000 SKUs
• 2,000 pallets on hand

Applying the principle would look like this:

• 1,000 pallets (50%) is made up of by 100 SKUs (10%)
• 600 pallets (30%) is made up of by the next 100 SKUs

Therefore,

• the top 100 SKUs will have (on average) 10 pallets of inventory on hand each.
• the next 100 SKUs will have 6 pallets on hand each.
• the final 800 SKUs will have on average this quantity of pallets on hand:
  • 1 pallet on hand and
  • .2 pallets on hand.

So what can be said about storing those top moving pallets?  Using the rule of 4, the following recommendations can be made about storing those SKUs and the type of storage media:

• Store the fastest moving SKUs 2 pallets (deep reach or 2-deep pushback)
• Store the medium-fast moving SKUs 1 pallet deep (single selective racking)
• Store the medium-slow moving SKUs in carton flow or shelving
• Store the slowest moving SKUs in shelving or a vertical lift module

Scenario 2

• 200 SKUs
• 5,000 pallets on hand

Applying the principle would look like this:

• 2,500 pallets (50%) is made up of by 20 SKUs (10%)
• 1,500 pallets (30%) is made up of by the next 20 SKUs

Therefore,

• the top 20 SKUs will have (on average) 125 pallets of inventory on hand each.
• the next 20 SKUs will have 75 pallets on hand each.
• the final 160 SKUs will have on average this quantity of pallets on hand:
  • 12.5 pallets on hand and
  • 2.5 pallets on hand.

Using the rule of 4, the following recommendations can be made about storing those SKUs and the type of storage media:

• Store the fastest moving SKUs 31 pallets deep (deep lane storage storage such as pallet shuttle or bulk stacking)
• Store the medium-fast moving SKUs 18 pallets deep (deep lane storage storage such as pallet shuttle, drive-in racking or bulk stacking)
• Store the medium-slow moving SKUs 3 pallets deep (push back or pallet flow)
• Store the slowest moving SKUs in single selective rack.