Pareto analysis - Seven steps to identifying the important causes using Pareto Analysis

Pareto Analysis

The Pareto Chart or Pareto Diagram, named after the famous economist Vilfredo Pareto (1848-1923), is a common tool for quality control and is used as part of a Pareto Analysis to visually identify the most important factors, most occurring defects, or the most common problems, or in other words "the vital few".

Pareto Analysis is a statistical technique in decision making that is used for the selection of a limited number of tasks that produce significant overall effect. It uses the Pareto Principle (also know as the 80/20 rule) the idea that by doing 20% of the work you can generate 80% of the benefit of doing the whole job. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%). This is also known as the vital few and the trivial many. The 80/20 Rule may be applied to almost anything, from the science of management to the physical world.

What Is It?

The Pareto Chart is one of the 'Seven Basic Tools of Quality Control.' It helps highlight the most important factors from among a group of many factors. In quality control, it is often used to represent the most common sources of defects or the highest occurrence of defects. It is a simple bar chart that displays the number of occurrences on the left vertical axis and the category of occurrences on the horizontal axis. While not required, you can add a right vertical axis which represents the cumulative percentage of the left axis to the total.

The Pareto Principle, or 80-20 Rule, is a general rule-of-thumb or guideline that says that 80% of the effects stem from 20% of the causes. Vilfredo Pareto originally observed that in Italy, 80% of the land was owned by 20% of the people. Dr. Joseph M. Juran, a 20th century evangelist for quality management, applied this principal to quality control and preferred the use of the phrase "the vital few and the useful many" to describe the 80-20 rule. Although the actual numbers may be different from case-to-case, the Pareto Principle is a guiding principle used in business for ...

  • Customer Complaints (e.g. 80% of the complaints come from 20% of the customers)
  • Management (e.g. 80% of the results come from 20% of the group)
  • Sales (e.g. 80% of the profits come from 20% of the products)
  • Quality Management for identifying the most important causes for defects (e.g. 80% of the problems come from 20% of the causes)

A pareto chart can help you quickly identify the most significant factors, but choosing which problems to fix may still require a cost-benefit analysis. If you have a single factor causing 50% of the problems, but it would cost you a million dollars to fix, and there are 3 other factors causing a total of 30% of the problems that would be much less expensive to fix, perhaps solving the 3 other factors first would be more beneficial.

Chart Example

Look at a part of your business where you have had consistency problems. An example might be customer service problems. Say you collect data on your customer complaints for April and find that you have problems with:

  • delivery when promised (5 complaints)
  • quantity delivered (12 complaints)
  • invoice pricing errors (8 complaints)
  • invoice quantity errors (2 complaints)
  • damaged product (26 complaints)

Seven steps to identifying the important causes using Pareto Analysis :

  1. Form a table listing the causes and their frequency as a percentage.
  2. Arrange the rows in the decreasing order of importance of the causes, i.e. the most important cause first.
  3. Add a cumulative percentage column to the table.
  4. Plot with causes on x-axis and cumulative percentage on y-axis.
  5. Join the above points to form a curve.
  6. Plot (on the same graph) a bar graph with causes on x-axis and percent frequency on y-axis.
  7. Draw a line at 80% on y-axis parallel to x-axis. Then drop the line at the point of intersection with the curve on x-axis. This point on the x-axis separates the important causes on the left and less important causes on the right.

This is a simple example of a Pareto diagram using sample data showing the relative frequency of causes for customer service problems. It enables you to see what 20% of complaints are causing 80% of the problems and where efforts should be focussed to achieve the greatest improvement.

The value of the Pareto Principle for a project manager is that it reminds you to focus on the 20% of things that matter. Of the things you do during your project, only 20% are really important. Those 20% produce 80% of your results. Identify and focus on those things first, but don't totally ignore the remaining 80% of causes.