Many years ago a sociologist by the name of Vilfredo Pareto developed what eventually would become one of the most well known concepts in the world. Pareto who had already made significant contributions to the world of microeconomics discovered that about 80% of the wealth in italy was owned by only 20% of the population. This revolutionary discovery eventually lead to what we know today as the Pareto principle, or the 80/20 rule. Over some period of time the Pareto concept began to gain a reputation for separating what is often referred to as the vital few from the trivial many. While it is important to understand history and how things come to be what we really want to understand today is when to use the Pareto chart and how we can leverage opportunities from analyzing the chart.
First and foremost let’s stick a definition on the Pareto principle: Officially defined Pareto’s concept suggests that most effects come from relatively few causes. To be even more specific Pareto’s concept suggests that 80% of effects are directly related to 20% of causes. The principle is often used in the narrowing down of choices and focusing in on priorities. For instance if a problem consistently occurs we can use a pareto chart to analyze the problems frequency and laser in on areas that will provide us with the most opportunity to improve. Another example might be when there is a large number of problems or solutions available the pareto principle helps us to focus in on the most significant and biggest impact activities. Finally one of the most valuable ways to use Pareto’s law is in improvement initiatives or projects. Using charts and graphs can help others understand why decisions are made based on actual data.
While Pareto’s concept is rather broad in application let’s walk through a general understanding of how you can perform a pareto analysis to separate the vital few from the trivial many.
General concepts for how you can perform a pareto analysis:
1. First define what groups you will use to measure. If you are measuring for time, base your categories on times. If you are measuring for cost you will want to tie your categories to measurements that have cost associated with them. Once you have defined the categories and appropriate measurements that will be used there are a few different directions you might go in:
1a: The first direction would be if data does not exist. In this case you will need to go and collect the appropriate measurements according to what was defined in the the first stage.
1b: If you had data on hand already you need to ensure that the categories you established and the measurements align. For example it may not be appropriate to use a time based data series for cost analysis unless your analysis is labor based.
2. After the measurements have been collected the next step is to create a pareto diagram. This diagram will help us analyze and separate the "vital few from the trivial many." Some things you will want to look for in the Pareto chart are:
- Where is the 80% line at?
- Which of your categories are the largest issues?
- Based on the graph and the data in the graph where is the best area to focus on?
Once your analysis is complete your team should have a list of great opportunities to act on if it's appropriate for the initiatives focus. Try out the Pareto graph on your next initiative and see how you like it. If you're interested in playing around with this powerful tool known as the pareto chart simply fill out the form below which will grant you access to many great templates. As always my friends if you have any questions please feel free to send us a message. Don't forget to get your free pareto template.