Learn what a Pareto diagram is, see some examples of the Pareto principle in action, read the benefits of the Pareto diagrams, and learn the eight steps to creating a Pareto diagram.
What is a Pareto diagram?
A Pareto chart is a visual bar chart that consists of a bar chart and a line chart. The bar graph shows the causes in descending order of their frequency, while the line graph shows the cumulative percentage in ascending order.
What is the Pareto principle?
The Pareto diagram stems from the Pareto principle, commonly known as the 80/20 rule, which states that 80% of the output of a given situation or system is determined by only 20% of the input. In other words, when multiple factors influence a situation, a few factors will account for most of the impact.
TO SEE: Recruitment Package: Data Scientist (Tech Republic Premium)
The Pareto principle can be applied to a wide range of fields, such as manufacturing, project management, human resources, customer-facing businesses, quality analysis, software testing, and personal life.
The reason the Pareto principle is so effective is that it is impractical to spend all your resources on solving all the problems that arise during a project. You need to identify the most common problems so that you can use the minimum resources to solve them while getting the best possible result.
A Pareto chart helps achieve this as these charts help identify the most common types of defects or other causes of problems. That way, you can prioritize and focus on solving the 20% of the problems that require the least effort, while still delivering the 80% result.
Some examples of the Pareto principle are:
- About 20% of your customers account for 80% of your company’s revenue.
- Customers use 20% of your application’s features 80% of the time.
- About 20% of design errors cause 80% of software errors.
- Only 20% of a company’s employees generate 80% of its profits.
Why Use a Pareto Chart?
Here are the advantages of Pareto diagrams:
- Pareto diagrams identify key root causes, helping teams focus their efforts on areas of greatest impact.
- The charts are an excellent visualization tool when you have many problems, causes or conditions and want to find the essential few from the trivial many as the charts organize data to show different problems or the causes of problems.
- They improve the effectiveness of quality management, overall performance management, planning, analysis and problem solving.
- These charts guide decision making and problem solving.
- They help to better plan corrective and preventive actions.
- A Pareto chart helps with time management at work or on a personal level.
Create a Pareto diagram
List and group the category of problems, items, or causes.
Set the benchmark. For example, you can measure the data in terms of:
- Frequency: The number of times a problem has occurred.
- Duration: How long will it take.
- Cost: How many resources it uses.
Choose the duration for the data collection, for example a week, month or year.
Collect the data and then calculate the grand total for all items. Calculate the percentage of each item by taking the item’s frequency, dividing it by the grand total, and multiplying by 100.
List the items in ascending order – most common to least common. Next, calculate the cumulative percentage of each item by adding the sum of that item’s percentage to the percentage of the item before it.
Create a bar chart and draw 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 must equal 100%.
Draw the cumulative line graph by adding the cumulative percentages of each category. The first point on the cumulative line graph must be aligned with the top of the first bar.
Analyze the chart to identify the items that seem to be causing the most problems. The few bars on the left side of the Pareto chart are the source of most – say 80% – of the problems. That gives a clear picture of which areas you need to tackle.
You can also look at the cumulative line graph, which should show a clear breakpoint where it starts to level off quickly. This means that the first few problem areas quickly make up a high percentage of total problems.
A Pareto diagram is easy to draw, use, and communicate problems. The charts are an excellent quality management tool that can be used for a variety of purposes. They distinguish the vital few from the trivial many because they represent the relative size of different categories, sorted by significance. Use them to prioritize your work by finding the small causes with the biggest impact and then solving them.