In which circumstances would it be relevant for a procurement organisation to apply the Pareto principle (the 80/20 rule) to analyse expenditure with suppliers? Select TWO that apply.
A.
To identify strategic suppliers requiring closer management
B.
To identify the frequency of performance-related payments to suppliers
C.
To identify optimum commercial opportunities to change supplier relationships
D.
To identify the extent of variation of cost in a contract
E.
To identify the expiry dates of existing supplier contracts
The Pareto principle, or the 80/20 rule, is a tool used in procurement to identify that approximately 80% of an organisation's spend is typically with 20% of its suppliers. Applying this principle helps in:
Identifying Strategic Suppliers:Recognising which suppliers account for the majority of spend allows organisations to focus on managing and nurturing these key relationships.
Optimising Supplier Relationships:Understanding spend distribution can highlight opportunities to renegotiate terms, consolidate suppliers, or adjust sourcing strategies for better efficiency and cost savings.
Exact Extract from Study Guide:
"The Pareto Principle is used to identify that 80% of spend is typically with 20% of suppliers, enabling procurement to focus on strategic supplier management and optimise commercial relationships."
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