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What is Pareto Chart? What is the 80/20 rule? How to create a Pareto chart? Benefits of using Pareto Chart

What is Pareto Chart?

A Pareto chart which is also known as Pareto Diagram is a form of a graph that includes both bars and a line graph, with bars representing individual values in descending order and a line representing the cumulative total.

The graph is called after the Pareto principle, which is named after Vilfredo Pareto, a well-known Italian economist. The bars’ lengths signify frequency or cost (time or money), and they’re organized with the longest on the left and the shortest on the right.

The chart clearly displays which scenarios are more important in this way. Pareto chart is part of seven basic problem-solving tools.

Pareto charts can be used to identify which defects should be prioritized in order to get the largest overall improvement. Not only defects this, can be helpful in prioritization of any problems

The Pareto principle’s origins

Vilfredo Pareto

Vilfredo Pareto found in his garden in the 19th century that 20% of the pea pods contained 80% of the peas. Pareto was also an economist, and the finding of the pea pod got him thinking. In 1896, he produced a report revealing that roughly 20% of the people held around 80% of the land in Italy.

After coming across Pareto’s work, Joseph M. Juran discovered how applicable this concept was to quality management difficulties. As an engineer, he’d discovered that a tiny number of flaws were responsible for the majority of problems. He coined the term “Pareto principle” to describe the trend.  Since then, the phrase has come to be used to characterize any phenomenon in which a small number of elements account for a substantial proportion of the effect.

What is the 80/20 rule of Pareto charts?

The Pareto Chart, popularly known as the 80/20 Rule, is a very effective tool for demonstrating the relative importance of problems.

It has both bars and lines, with bars representing individual values in descending order and a curved line representing the sample’s cumulative total. An 80 percent cut-off line is also provided to show where the 80/20 rule applies, i.e. where the most important few components fall under the 80 percent cut-off line.

Managers, for example, should devote the most attention to aspects that are crucial to their company’s performance once they have identified them.

08 Steps to Create a Pareto chart?

Let’s learn now how to create a Pareto chart. Herewith I will explain to you the 08 steps to create a Pareto Chart.

1st Step:  Make a List

Make a list of the issues, products, or causes that will be compared. Ultimately after completion of Pareto creation, we need to pick a vital few from this list only. Hence, the focus should be given by the team to clearly identify the concern area for the analysis.

2nd Step: Create a common metric

Create a common metric for comparing things.

  • The frequency with which it occurs: (e.g., utilization, complications, errors)
  • How long does it take?
  • How much does it cost in terms of resources?

3rd Step: Select a timeframe for data collection.

Data collection is one of the most important steps of creating a Pareto chart, as if data collected are not authentic and reliable then complete analysis will be not at all reliable. Hence, the team should focus on collecting authentic data within a set timeframe.

4th Step: Percentage calculation

Add up how many times each item appeared (or cost or the total time it took). Then add these sums together to get the total for all of the goods. Take the sum of each item, divide it by the grand total, and multiply by 100 to get the percent of each item in the grand total.

5th Step: Cumulative Percentage Calculation

List the items to be compared in decreasing order of the comparison measure: for example, from most to least often. The cumulative percent for an item is the sum of that item’s percent of the total plus all other items in the ordering by rank that come before it.

6th Step: Mapping the Cumulative Percentage

 In a graph, order the items on the horizontal axis from highest to lowest. Label the numbers (frequency, time, or cost) on the left vertical axis, then the cumulative percentages on the right vertical axis (the cumulative total should equal 100 percent). For each item, draw the bars.

7th Step: Create a line graph

Create a line graph using the total percentages. The top of the first bar should match up with the first point on the line graph. Simple charting tools are available in Excel, or you can use paper and pencil to create your graphs.

8th Step: Identifying the Vital few

Analyze the diagram for the components that appear to be the source of most of the trouble. Look for an obvious breakpoint in the line graph, where it begins to swiftly level out.

Identify the things that contribute to 50% or more of the effect if there isn’t a breakpoint. Consider several factors that may affect the outcome, such as the day of the week, shift, age, machine type, section, and line, if there appears to be no pattern (the bars are virtual all the same height).

Then, to check if a pattern emerges, divide the data into subgroups and create separate Pareto charts for each grouping.

Benefits of using Pareto Chart

Individuals must outline needed modifications or organizational issues as part of Pareto analysis. After the modifications or issues have been listed, they are ranked in order of severity, from the most severe to the least severe.

The most serious problems should be the primary focus of problem resolution or improvement. Organizational efficiency is improved by focusing on problems, causes, and solutions.

Companies run more effectively when employees discover the fundamental causes of problems and spend time tackling the most pressing issues to maximize organizational value.

Following are some of the key benefits of using the Pareto Chart:

  1. Improved Problem-Solving Qualities

When you undertake a Pareto analysis, you can improve your problem-solving skills by organizing work-related difficulties into cohesive facts. You can start planning to tackle the difficulties once you’ve properly established these facts. Pareto analysis can be done by a group of people. Reaching a group consensus on the issues that need to be addressed promotes organizational learning and strengthens group cohesion.

  • Better Decision-Making

Individuals who conduct a Pareto analysis are able to evaluate and compare the impact of changes in a company. During a Pareto analysis, the techniques and processes required to make the modifications should be recorded with a focus on resolving difficulties. This documentation will aid in improved planning and decision-making in the event of future adjustments.

  • Time and money are saved.

Most seasoned paid search marketers utilize Pareto analysis as one of their cause-and-effect models to save time and cut down on ad campaign waste.

  • Analyze Your Most Profitable Clients

When it comes to market segmentation, the Pareto tool is on steroids. The tool is strategically placed to give you in-depth insights into the customers who account for 80% of your sales revenue.

It’s no secret that even global corporations have trouble identifying their core clientele in order to re-allocate resources. In today’s digital marketing, targeting appears to be a winning strategy.

Conclusion

A Pareto chart is an important component of the Seven Basic Quality Tools (7QC Tools) and a significant tool in quality management. This diagram aids project managers in identifying tiny reasons that have a large impact on the project.

It assists project managers in prioritizing the work of small reasons that have the greatest impact on the project’s goal. It’s easy to draw, use, and explain problems to stakeholders because it’s a bar chart version.

P.S: What role does the Pareto Chart play in your project? Please leave a comment with your thoughts.

Quality HUB India Offered related Online Training Program

Hindi Version

  1. Problem Solving Tools (7QC + 7M) & Root Cause Analysis
  2. Problem Solving Technique (8D, PDCA & A3)

English Version

  1. Problem Solving Tools (7QC + 7M) & Root Cause Analysis
  2. Problem Solving Technique (8D, PDCA & A3) – Under Development

Related Articles:

  1. What is Fishbone Diagram or Cause and Effect Diagram? How to use a Fishbone Diagram. (English)
  2. What is Fishbone Diagram or Cause and Effect Diagram? How to use a Fishbone Diagram. (Hindi)
Author

Aryan Viswakarma

Founder CEO Quality HUB India & NOICE Academy

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