Pareto Analysis

Posted on May 15 2009

The decision maker will use this analysis , technique and tool, to target major causes so that the decision strives for elimination in the most cost-effective improvement solution.

Pareto Analysis, or the Pareto Principle as it is more commonly known, has become commonly known as the 80/20 Principle in it’s most recent times.

Richard Koch, has become famous for some absolutely great books.

Koch states “80 percent of results flow from 20 percent of causes”. If we believe this to be true, and most do, most of what exists today – all great ideas, innovations and results of productivity have been the product of 20% of all effort expended.

Steps to identify important causes:

Determine the categories and the units for comparison of the data, such as frequency, cost, or time.

1. Create a table with the causes and their frequency as a percentage.

2. Arrange the rows in the decreasing order of importance of the causes — put the most important or largest cause first at the top of the list

3. Add a cumulative percentage column to the table

4. Plot a chart, using causes on the X axis, and cumulative percentage on Y axis 5. Label the left-hand vertical axis with the unit of comparison, such as frequency, cost or time. label the horizontal axis with the categories. List from left to right in rank order

6. draw in bars for each category representing the total for that category. 5. Join the above points to form a curve

7. Draw line at 80% on the Y axis, while remaining parallel to X axis

8. Drop the line at the point of intersection with the curve on X axis. This point on the X axis separates the important causes and trivial causes

See the sample

Tips for effective use of the Pareto technique:

1. Create before and after comparisons of Pareto charts to show impact of improvement efforts.

2. Construct Pareto charts using different measurement scales, frequency, cost or time.

3. Use objective data to perform Pareto analysis rather than team members opinions.

4. If there is no clear distinction between the categories — if all bars are roughly the same height or half of the categories are required to account for 60 percent of the effect — consider organizing the data in a different manner and repeating Pareto Analysis

5. Pareto analysis is most effective when the problem being studied is defined in terms of shrinking the present value to a customer target. For example, reducing unnecessary process steps in production of a product.

For more decision making tools, see Decision Making Tools. For our special decision making guides which use this tool, see our DECIDE GUIDES

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