Learn what a Pareto chart is, see a few examples of the Pareto Principle in action, read benefits of the Pareto charts and learn the eight steps involved in creating a Pareto chart.
What is a Pareto chart?
A Pareto chart is a visual bar chart that consists of a bar graph and a line graph. The bar graph displays causes in descending order of their frequency while the line graph presents cumulative percentage in ascending order.
What is the Pareto principle?
The Pareto chart stems from the Pareto principle, commonly known as the 80/20 rule, which states that 80% of the output from a given situation or system is determined by a mere 20% of the input. In other words, when multiple factors influence a situation, a few factors will be responsible for most of the impact.
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The Pareto Principle can be applied in a wide range of areas such as manufacturing, project management, human resources, client-based businesses, quality analysis, software testing and one’s personal life.
The reason why the Pareto principle is very effective is because it’s impractical to devote all your resources to resolving all the issues that arise during a project. You must identify the most frequent issues so you can use the minimal resources to solve them while delivering the best possible outcome.
A Pareto chart helps achieve this because these charts help identify the most common types of defects or other causes of problems. That way you can prioritize causes and focus on solving the 20% of issues that require the least effort while still yielding the 80% outcome.
A few examples of the Pareto principle include:
- Some 20% of your clients account for 80% of your company’s sales.
- Customers use 20% of the features on your application 80% of the time.
- Approximately 20% of design flaws cause 80% of the software’s failures.
- Only 20% of a company’s employees drive 80% of the profits.
Why use a Pareto chart?
Here are the advantages of Pareto charts:
- Pareto charts identify top root causes, and this helps teams focus effort in areas that will have the greatest impact.
- The charts are an excellent visualization tool when you have many problems, causes or conditions and want to find the vital few out of the trivial many, because the charts organize data to show various problems or the causes of problems.
- They improve the effectiveness of quality management, general performance management, planning, analysis and troubleshooting.
- These charts guide decision-making and problem-solving endeavors.
- They help better plan corrective and preventive actions.
- A Pareto chart helps in time management at work or on a personal level.
How to create a Pareto chart
List the category of issues, items or causes and group them.
Determine the standard of measurement. For example, you can measure the data in terms of:
- Frequency: The number of times a problem has occurred.
- Duration: How long it takes.
- Cost: How many resources it utilizes.
Choose the duration for collecting the data — say a week, month or year.
Collect the data, then calculate the grand total for all items. Calculate the percentage of each item by taking the frequency of the item, dividing it by the grand total and multiplying by 100.
List the items in ascending order — the most frequent to the least frequent. Then calculate the cumulative percentage of each item by adding the sum of that item’s percentage to the percentage of the item that comes before it.
Create a bar graph and draw in the bars for each item on the horizontal axis from highest to lowest. Label the left y-axis with the numbers (frequency, time or cost), then label the right y-axis with the cumulative percentages. The cumulative total should equal 100%.
Draw the cumulative line graph by joining the cumulative percentages of each category. The first point on the cumulative line graph should line up with the top of the first bar.
Analyze the chart to identify those items that appear to account for most of the difficulty. The few bars on the left side of the Pareto chart are what account for most — say, 80% — of the problems. That gives a clear picture of which areas you should address.
You can also look at the cumulative line graph, which should show a clear breakpoint where it starts to level off quickly. This implies that the first few problem areas rapidly add to a high percentage of the total problems.
A Pareto chart is easy to draw, use and communicate problems. The charts are an excellent quality management tool that can be used for various purposes. They separate the vital few from the trivial many as they display the relative magnitude of different categories sorted by significance. Use them to prioritize your work by finding the minor causes with the biggest influence, then solve them.