Pareto Analysis for Dummies

Pareto Analysis – Ever so often, we find that a single rotten apple can lay to spoil an entire bunch in the basket. Similarly, ever so often, do we find that a disproportionate majority of quality issues and defects that crop up in businesses are cause by a small set of problems. Project management scholars have for many years debated and analyzed this aspect affecting our business strategies and the way we function as a unit.

With issues and irregularities cropping up in our product quality, it became a necessity for teams to analyze what was going wrong and come up with different tools for analyses. One of them was Pareto Analysis that stemmed from the basic principle called the Pareto Principle, which is based on the same fact that many problems arise from limited sources. In this article, we will dive a bit deeper into understanding Pareto Analysis and how to conduct these analyses to better place our business quality and functioning.

Analyzing Pareto Analysis

Pareto Analysis essentially states that 80% of the defects and issues in the quality of the end product delivered to the customers and consumers is caused and brought about by just a mere 20% of the problems and process deformities encountered during the production process. This again could be reinstated as: if we look out for that 20% of the problems, we will be able to resolve about 80% of the quality issues reported by customers on the product.

The entire concept then pits us against this 20% and allows us to dedicate our time and resources in finding out, eradicating, and setting up preventive measures for these quality-oriented issues. Being able to resolve 80% of the issues related to quality right in the production stage is recommended for every business that faces issues with their product quality. Achieving 100% quality on your product can be quite a daunting job and maintaining it can be daunting further still. You will require all the help you can possibly find and interestingly enough, if you obtain a tool such as Pareto Analysis, you are surely going to mark improvements almost instantly and say your goodbyes to those 80% problems cause by 20% of the miscreants.

History of Pareto Analysis

Knowing the basis for Pareto Analysis can be quite some knowledge for you to begin with and I am going to introduce just that to you. Taking you back to the 19th century and the dawn of the 20th century, we have Vilfredo Pareto, a noted economist, who would always have a go at studying the economies across regions and how each person in society would attribute to it.

According to Pareto’s findings, based on his tremendous research, he deduced that 80% of the wealth of the region in Italy came from only 20% of the population residing in the region. His theory was groundbreaking. He formalized the 80-20 count after carefully studying the distribution of wealth not only in his hometown but subsequent towns across Italy. Over the years, this principle and theory came to be recognized not only in the economic space but also in quality and project management. It was Joseph Juran, a noted American engineer and management consultant who, many years later in the 1940s, applied this principle to quality control and thus resurfaced the process of Pareto Analysis.

He put into practice an analysis technique that showed 80% of the qualitative defects or errors stemming from 20% of the problems. Thus, focusing on those 20% could put to rest 80% of your product errors, giving your product a high level of quality.

Why Pareto Analysis?

Take into consideration that you’re running your own restaurant. You want to check for the high points in your menu—items that sell the most, and the weak points—items that sell the least.

Using Pareto Analysis, you will be able to figure out that 20% of your menu gathers for you 80% of the profit. You will then ask your chefs to concentrate on improving those hotcakes further still so as to attract more crowds to your restaurant, perhaps even make them the signature dishes. And, on the flip side, you will even look at the 80% of your menu that’s contribute to just 20% of the profits made and remove some items that feature the least and make up for the rest. This way you will have a fixed aim at the items and will have greater control over what goes out of that kitchen.

As stated, this will be just one of the ways where Pareto Analysis helps you narrow down on central issues and peak points in your business and even helps you keep a constant roving eye on them.

Another example that I would like to share is from my own experience as a Project Manager. Errata on product text received from customers were categorized into 7 different categories. Having applied Pareto Analysis on this set of data brought me to realize that 2 categories constituted of 80% of the errata we were receiving, while the remaining 20% were distributed among the remaining 5 categories. With this realization on paper and backed with data and figures, my team and I were able to concentrate heavily on eradicating the errors marked in those categories right in the production stage.

With a combination of root cause analysis, we were able to resolve that chuck of 80% errors by 10% each passing month. Giving us a boost in quality control, we found lesser errata coming in from customers and more satisfaction and belief in the product and brand.

Given below is the list of what Pareto Analysis can do for you once you bring it in a corporate environment:

• Helps you to find the start line for your problem-solving spree
• Helps categorize the errors, defects, customer complaints, quality parameters that need attention
• Helps you gain a visual representation of the 80-20 effect through Pareto Chart or Pareto Diagram

This is the power of Pareto Analysis and the answer to why we need it.

Pareto Chart/Diagram – How to Use It?

Putting into effect the Pareto Chart can be summarized as part of 4 phases. These phases of Pareto Analysis look directly into steps that will lead you to construct a Pareto Chart for your use. We’ll go through these phases one by one and have them associated with the steps to achieving a conducive and perfect Pareto Chart for all your problems analyses.

1. Phase 1 – Identification

In this phase, you will look at the following steps:

• Classify all your problems that are resulting in inferior product quality. At some point, customers/distributors may have rejected these products. You will be able to find the reasons to this quality by gaining feedback from these sides and even reviewing your own processes and workflow.

• Create a rough list of problem and issue categories on them. Restrict yourself to 5-6 problem categories, and note that this list can be subjected to modification during the course of the analysis.

Identification and creation of a list can be achieved through brainstorming sessions, focus group meetings, customer feedback, and through employee/executive surveys within your team or the affected department. Through these activities, it will become easier for you to narrow down to categories that on a wide scale affect and degrade the quality of the products belted out.

2. Phase 2 – Time and Assessment

In this phase you will look at the following steps:

• Fix a time frame for the list that you’re considering. In this time frame you will consider completing the entire analysis along with gathering of data and preparation of the Pareto Chart for each and every item on that list. Time frames always ensure that work is currently organized and in time for implementation.

• Issue tally marks for the number of occurrences that each problem categorizes into. As contingency, ensure that you have an “Others” category to tally problems that don’t fit into the existing categories.

• Get a number to the total occurrences in each category and produce a grand total of occurrences.

• Obtain the percentage by dividing the number in each category with the total number of occurrence obtained.

The intention of this phase is to gather enough statistical data and information to assess the problems effectively and efficiently. The time period over which you will collect this data and sit across the table to analyze them will help you gain an overview into the possibilities of where these problems may lead you. The frequency will also enable you to put into place quality control measures to grab the quality at each and every step of the allotted process and gauge the different levels of issues and causes for those issues.

3. Phase 3 – Summarization and Graphical Representation

In this phase we will look at the following steps:

• Rearrange the categories in the order of those with the highest percentage and gradually drop through till the least harmful or not so frequently occurring problem on the list. Draw out the “Others” category at the end irrespective of the tally percentage it holds.

• Construct a graph with a horizontal axis and two vertical axes on either sides of your screen. Plot the left vertical axis with increments starting from zero and ending up to the total occurrences calculated during striking the tally marks. While on the other hand, plot the right vertical axis with increments starting with zero and ending in 100%.

• Plot the first vertical bar with the highest percentage, start from the left and slowly progress through till the lowest percentage and finally conclude with the “Others” vertical bar. The height of these bars will be marked against the values mentioned on the left axis (number of occurrences) and the percentage of the total on the right axis. Maintain no space between these bars and keep the width consistent through all the bars representing the categories. It should look something like this:

• Provide labels to the bars right under the horizontal axis.

• Start at the left zero point and plot a line depicting the cumulative percentage total reached with the addition of each category as they progress. This line will end at the 100% on the right vertical axis. This will look something like this:

You can conduct these steps into preparing the Pareto Chart in a repetitive manner so as to break the categories further. This solely depends on the intensity of the problem categories that you have come up with.

4. Phase 4 – Interpretation

This final phase involved in Pareto Analysis is the interpretation of the Pareto Chart that you have laid out before yourself. If we span the chart from left to right, we will see the categories contributing to maximum occurrences of the problem and this graph gradually lowers down as you span right. You will be able to see the line that you plotted starting at the zero point on the left vertical axis to the 100% mark on the right vertical axis; this serves as a gauge to understand and watch the Pareto Principle come to life.

We will be able to clearly see the 80-20 breakup that the Pareto Principle dictates. 80% of the occurrences of issues/defects/errors are caused by only 20% of the categories that you narrowed down to. With this interpretation at hand, you will have to target the left-most categories and then proceed to the right. The left categories are the problem areas and need attention most urgently for you to increase your product quality and ensure customer satisfaction.

You can have Pareto Analysis conducted once again on 20% of categories and break them down further. This will surely be effective.

Benefits of Pareto Analysis and Pareto Chart

A Pareto Chart is a great tool for project managers and business executives when they find themselves in situations where the process that was investigated using the Pareto Analysis framework results in categorization of errors, defects, or abnormalities of that kind. Being able to put a number to these categories can help you plot them graphically, thus, bringing you to a visual treat of what you need to focus on and its magnitude. The Pareto Chart also enables you to rank in hierarchy and the descent to the low-key problems and issues.

By the sound of it, there are many benefits that can be reaped from Pareto Analysis and the Pareto Chart, helping you with identifying and gradually rectifying these errors and defects. Summarizing the benefits, we have the following list:

• Using identification and categorization based on hierarchy, Pareto Analysis and the Pareto Chart can highlight the main 20% causes to 80% of the problems
• As it allows for priorities to be set for many practical applications, which include process improvement trials, checking for customer needs and demand, investment and deal opportunities, and many more
• As it allows for us to concentrate our efforts at improving a set category, thus, helps in saving time and resource
• As it allows better utilization of resources and time on a higher scale