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TQM Notes : Pareto Analysis

Pareto Analysis Step by Step
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By Duncan Haughey, PMP

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.
In the late 1940s quality management guru Joseph M. Juran suggested the principle and
named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy
went to 20% of the population. Pareto later carried out surveys on a number of other
countries and found to his surprise that a similar distribution applied.
The 80/20 rule can be applied to almost anything:
80% of customer complaints arise from 20% of your products or services.
80% of delays in schedule arise from 20% of the possible causes of the delays.
20% of your products or services account for 80% of your profit.
20% of your sales-force produces 80% of your company revenues.
20% of a systems defects cause 80% of its problems.
The Pareto Principle has many applications in quality control. It is the basis for the Pareto
diagram, one of the key tools used in total quality control and Six Sigma.
In PMBOK Pareto ordering is used to guide corrective action and to help the project team
take action to fix the problems that are causing the greatest number of defects first.
Pareto Analysis
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 errors on websites. It enables you to see what 20% of cases 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.
For example, we may have a large number of customer complaints, a lot of shop floor
accidents, a high percentage of rejects, and a sudden increase in costs etc. The first stage is
to carry out a Pareto analysis. This is nothing more than a list of causes in descending order
of their frequency or occurrence. This list automatically reveals the vital few at the top of
the list, gradually tailing off into the trivial many at the bottom of the list. Managements
task is now clear and unavoidable: effort must be expended on those vital few at the head
of the list first. This is because nothing of importance can take place unless it affects the
vital few. Thus managements attention is unavoidably focussed where it will do most good.
Another example is stock control. You frequently find an elaborate procedure for stock
control with considerable paperwork flow. This is usually because the systems and
procedures are geared to the most costly or fast-moving items. As a result trivial parts may
cost a firm more in paperwork than they cost to purchase or to produce. An answer is to
split the stock into three types, usually called A, B and C. Grade A items are the top 10
percent or so in money terms while grade C are the bottom 50-75 percent. Grade B are the
items in between. It is often well worthwhile treating these three types of stock in a
different way leading to considerable savings in money tied up in stock.
Production control can use the same principle by identifying these vital few processes, which
control the manufacture, and then building the planning around these key processes. In
quality control concentrating in particular on the most troublesome causes follows the
principle. In management control, the principle is used by top management looking
continually at certain key figures.
Thus it is clear that the Pareto concept the vital few and the trivial many is of utmost
importance to management.
The Pareto chart
A Pareto chart is a graphical representation that displays data in order of priority. It can be
a powerful tool for identifying the relative importance of causes, most of which arise from
only a few of the processes, hence the 80:20 rule. Pareto Analysis is used to focus problem
solving activities, so that areas creating most of the issues and difficulties are addressed
first.

Some problems
Difficulties associated with Pareto Analysis:
Misrepresentation of the data.
Inappropriate measurements depicted.
Lack of understanding of how it should be applied to particular problems.
Knowing when and how to use Pareto Analysis.
Inaccurate plotting of cumulative percent data.
Overcoming the difficulties
Define the purpose of using the tool.
Identify the most appropriate measurement parameters.
Use check sheets to collect data for the likely major causes.
Arrange the data in descending order of value and calculate % frequency and/or cost
and cumulative percent.
Plot the cumulative percent through the top right side of the first bar.
Carefully scrutinise the results. Has the exercise clarified the situation?
In conclusion
Even in circumstances which do not strictly conform to the 80 : 20 rule the method is an
extremely useful way to identify the most critical aspects on which to concentrate. When
used correctly Pareto Analysis is a powerful and effective tool in continuous
improvement and problem solving to separate the vital few from the many other causes
in terms of cost and/or frequency of occurrence.
It is the discipline of organising the data that is central to the success of using Pareto
Analysis. Once calculated and displayed graphically, it becomes a selling tool to the
improvement team and management, raising the question why the team is focusing its
energies on certain aspects of the problem.
1. References
Wikipedia, Pareto Analysis
2.http://www.managers-net.com/paretoanalysis.html

A Pareto chart can be used to quickly identify what business issues need attention. By using
hard data instead of intuition, there can be no question about what problems are influencing
the outcome most.
In the example below, XYZ Clothing Store was seeing a steady decline in business. Before
the manager did a customer survey, he assumed the decline was due to customer
dissatisfaction with the clothing line he was selling and he blamed his supply chain for his
problems. After charting the frequency of the answers in his customer survey, however, it
was very clear that the real reasons for the decline of his business had nothing to do with
his supply chain. By collecting data and displaying it in a Pareto chart, the manager could
see which variables were having the most influence. In this example, parking difficulties,
rude sales people and poor lighting were hurting his business most. Following the Pareto
Principle, those are the areas where he should focus his attention to build his business back
up.
Create a Pareto Chart and identify the important causes that led to poor customer response.
The following data was collected during a survey:

Reason cited by customer Number of customers(f)
Faded clothing 15
Rude salesmen 60
Poor lighting 45
Limited sizes 30
Confusing layout 35
No parking space 85
Limited sizes 35
Total causes:7 305