Pareto chart and 80%-20% Rule

The Pareto Chart and the 80:20 rule are useful tools to drive Continual or continuous process improvement. If you want your business to flourish and stay ahead of your competition then you need to stay ahead of them in all aspects of your business. A pareto chart is one tool that you could use to help you stay ahead of the competition. The pareto Chart will highlight the vital few areas for you to target to tackle the bulk of your problems.

The 80:20 rule can help you identify the 20% of the causes that create 80% of the effect allowing you to focus on those vital 20% for maximum benefit rather than wasting your resources tackling the other 80% of the causes for minimal benefit.

The Pareto chart and the 80:20 rule are powerful tools to help you focus your resources effectively for maximum benefit and are very simple tools to use.

History of the Pareto Chart

Vilfredo Pareto discovered his “pareto principle” whilst studying the distribution of wealth for his works, he found that 80% of a countries land was owned by just 20% of it’s people. There is some argument as to the origin of his data however, it is often attributed as being based on Italian data as he was an Italian, however it is more likely that the data used was in fact from the UK. This principle was further expanded upon by the quality Guru Joseph Juran who applied the Pareto Principle across many industrial statistics.

By using a quality tool such as the pareto chart and the 80:20 Rule you can drive continuous process improvement.

The 80 20 rule is not always the right ratio, quite often we see 95 5 for instance or 60 40, however the 80 20 rule was the first ratio seen and identified and the one that seems to fit the majority of scenarios, therefore it is commonly used as a method to identify the vital few causes to the majority of our issues.

Directions for the map Pareto Chart

1.    Collect data about the contributing factors to a particular effect

(for example, the types of damages discovered in particular style).

2.    Order the categories according to magnitude (Descending order) of effect

(for example, frequency of damages).  If there are many insignificant categories, they may be grouped together into one category labeled “other.”  

3.    Write the magnitude of contribution (for example, frequency of error) next to each category and determine the grand total. Calculate the percentage of the total that each category represents.

4.    Working from the largest category to the smallest, calculate the cumulative percentage for each category with all of the previous categories.

5.    Draw and label the left vertical axis with the unit of comparison

 (for example, “Number of Damage ” from 0 to the grand total).  

6.    Draw and label the horizontal axis with the categories (for example, “Type of damage”), largest to smallest from left to right.

7.    Draw and label the right vertical axis “Cumulative Percentage,” from 0 to 100 percent, with the 100 percent value at the same height as the grand total mark on the left vertical axis.  

8.    Draw a line graph of the cumulative percentage, beginning with the lower left corner of the largest category (the “0” point).

9.    Analyze the diagram to indicate the cumulative percentage associated with the “vital few”

(Using 80:20 Rule )

Identify the Vital Few

The whole purpose of our Pareto analysis is to identify what many call the "Vital Few". With the effect we are looking at (Rejects, stock value, poor customers, absent employees etc.) being caused by only a small percentage of the population we are examining we are looking to identifying those vital few on which we can concentrate our actions.

By concentrating our actions on the vital few we ensure that we get the greatest impact from our actions and the greatest return on our investment

Pareto Principle, 80 20 Rule Examples

·         80% of your rejects are caused by 20% of the causes, so tackling this 20% will eliminate the bulk of your problems.

·         80% of the value of your stock is made up by 20% of the quantity, so if you need to reduce your stock value to free up cash you identify the most efficient way to spend your time.

·         80% of your profit comes from 20% of your line items, so the remaining 80% are not as important if you have to prioritize your production or decide which to phase out.

·         20% of your suppliers supply 80% of your goods, so if you need to work on supplier development these are the ones to work with first.

·         80% of your sales come from 20% of your clients, so who do you focus on?

·         80% of time off work will come from 20% of your employees, so you know which to spend time with.

·         80% of your time on this document will be spent looking at only 20% of it’s content, maybe?