Learn what a Pareto chart is, see a few examples of the Pareto Principle in action, read the benefits of a Pareto chart, and learn the eight steps involved in creating a Pareto chart.
Move in:
What is a Pareto chart?
A Pareto chart is a visual bar chart that includes a bar chart and a line chart. Bar charts show the causes in descending order of their frequency while line graphs show cumulative percentages in ascending order.
What is the Pareto Principle?
The Pareto chart is derived 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 only 20% of the input. In other words, when many factors influence a situation, a few factors are responsible for most of the impact.
UNDERSTAND: Recruitment Toolkit: Data Scientist (TechRepublic Premium)
The Pareto Principle can be applied in many areas such as manufacturing, project management, human resources, customer-based business, quality analysis, software testing, and one’s personal life.
The reason why the Pareto principle is so effective is that it is impractical to dedicate all of your resources to solving all the problems that arise in a project. You must identify the most common problems so that you can use minimal resources to solve them while delivering the best possible results.
Pareto charts help achieve this because they 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 the problems with the least amount of effort while still delivering 80% of the results.
A few examples of the Pareto principle include:
- About 20% of your customers account for 80% of your company’s sales.
- Customers use 20% of your app’s features 80% of the time.
- About 20% of design errors cause 80% of software failures.
- Only 20% of a company’s employees make 80% of its profits.
Why use a Pareto chart?
Here are the advantages of Pareto charts:
- The Pareto chart identifies the top root causes, and this helps teams focus their efforts on the areas that will have the greatest impact.
- Charts are a great visualization tool when you have a lot of problems, causes or conditions and want to find some important problems among many trivial ones, because charts organize data to show various problems or causes of problems.
- They enhance the effectiveness of quality management, general performance management, planning, analysis, and troubleshooting.
- These charts guide decision-making and problem-solving efforts.
- They help to better plan corrective and preventive actions.
- Pareto charts help with time management at work or on a personal level.
How to create a Pareto . chart
Step 1
List the problem category, item or cause and group them.
Step 2
Define the standard of the measurement. For example, you can measure data about:
- Frequency: The number of times the incident occurred.
- Duration: How long does it take.
- Cost: How much resources it uses.
Step 3
Choose a data collection period – say a week, month, or year.
Step 4
Collect the data, then sum all the items. Calculate the percentage of each item by taking the frequency of occurrence of that item, dividing by the total, and multiplying by 100.
Step 5
List items in ascending order – most frequent to least frequent. Then, calculate the cumulative percentage of each item by adding the item’s total percentage with the percentage of the item that preceded it.
Step 6
Create a bar chart and plot the bars for each item on the horizontal axis from highest to lowest. Label the left y-axis with numbers (frequency, time, or cost), then label the right y-axis with a cumulative percentage. The cumulative total must be 100%.
Step 7
Draw a cumulative line chart by concatenating the cumulative percentage of each category. The first point on the cumulative line chart should align with the top of the first bar.
Step 8
Analyze the chart to identify the items that seem to be the cause of the difficulty. The few bars on the left side of the Pareto chart are what account for most – for example, 80% – of the problems. That gives a clear picture of the areas you should tackle.
You can also look at the cumulative line chart, which will show a clear break point where it starts to level off rapidly. This implies that the first few problem areas quickly add up to a high percentage of the total number of problems.
Inference
Pareto charts are easy to draw, use, and communicate problems. Charts are a great quality management tool that can be used for a variety of purposes. They separate the important few from the important few as they show the relative magnitude of the different categories sorted by importance. Use them to prioritize your work by finding the small but most impactful causes, then addressing them.
