80Pareto analysis

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80/20 Rule (aka 80:20 Rule or 80 20 Rule)

ByKerri Simon

Vilfredo Pareto was an economist who is credited with establishing what is now widely known asthe Pareto Principle or 80/20 rule. When he discovered the principle, it established that 80% ofthe land in Italy was owned by 20% of the population. Later, he discovered that the paretoprinciple was valid in other parts of his life, such as gardening: 80% of his garden peas were

produced by 20% of the peapods.

Some Sample 80/20 Rule Applications

80% of process defects arise from 20% of the process issues. 20% of your sales force produces 80% of your company revenues. 80% of delays in schedule arise from 20% of the possible causes of the delays. 80% of customer complaints arise from 20% of your products or services.(The above examples are rough estimates.)

The Pareto effect.

In practically every industrial country a small proportion of all the factories employ a

disproportionate number of factory operatives. In some countries 15 percent of the

firms employ 70 percent of the people. This same state of affairs is repeated time

after time. In retailing for example, one usually finds that up to 80 percent of the

turnover is accounted for by 20 percent of the lines.

This effect, known as the 80 : 20 rule, can be observed in action so often that it

seems to be almost a universal truth. As several economists have pointed out, at theturn of the century the bulk of the countrys wealth was in the hands of a small

number of people.

This fact gave rise to the Pareto effector Paretos law: a small proportion of causes

produce a large proportion of results. Thus frequently a vital few causes may need

special attention wile the trivial many may warrant very little. It is this phrase that is

Related Tools &Articles

Bar Chart

Pareto Chart

Histogram
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most commonly used in talking about the Pareto effect the vital few and the trivial

many. A vital few customers may account for a very large percentage of total sales.

A vital few taxes produce the bulk of total revenue. A vital few improvements can

produce the bulk of the results.

The Pareto effect is named after Vilfredo Pareto, an economist and sociologist who

lived from 1848 to 1923. Originally trained as an engineer he was a one time

managing director of a group of coalmines. Later he took the chair of economics at

Lausanne University, ultimately becoming a recluse. Mussolini made him a senator in

1922 but by his death in 1923 he was already at odds with the regime. Pareto was

an elitist believing that the concept of the vital few and the trivial many extended to

human beings.

Much of his writing is now out of favour and some people would like to re-name the

effect after Mosca, or even Lorenz. However it is too late now the Pareto principle

has earned its place in the managers kit of productivity improvement tools.

This method stems in the first place from Paretos suggestion of a curve of the

distribution of wealth in a book of 1896. Whatever the source, the phrase of the vital

few and the trivial many deserves a place in every managers thinking. It is itself

one of the most vital concepts in modern management. The results of thinking along

Pareto lines are immense.

For example, we may have a large number of customer complaints, a lot of shop

floor accidents, a high percentage of rejects, and a sudden increase in costs etc. The

first stage is to carry out a Pareto analysis. This is nothing more than a list of causes

in descending order of their frequency or occurrence. This list automatically reveals

the vital few at the top of the list, gradually tailing off into the trivial many at the

bottom of the list. Managements task is now clear and unavoidable: effort must be

expended on those vital few at the head of the list first. This is because nothing of

importance can take place unless it affects the vital few. Thus managementsattention is unavoidably focussed where it will do most good.

Another example is stock control. You frequently find an elaborate procedure for

stock control with considerable paperwork flow. This is usually because the systems

and procedures are geared to the most costly or fast-moving items. As a result trivial

parts may cost a firm more in paperwork than they cost to purchase or to produce.


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An answer is to split the stock into three types, usually called A, B and C. Grade A

items are the top 10 percent or so in money terms while grade C are the bottom 50-

75 percent. Grade B are the items in between. It is often well worthwhile treating

these three types of stock in a different way leading to considerable savings in

money tied up in stock.

Production control can use the same principle by identifying these vital few

processes, which control the manufacture, and then building the planning around

these key processes. In quality control concentrating in particular on the most

troublesome causes follows the principle. In management control, the principle is

used by top management looking continually at certain key figures.

Thus it is clear that the Pareto concept the vital few and the trivial many is of

utmost importance to management.

The Pareto chart

A Pareto chart is a graphical representation that displays data in order of priority. It

can be a powerful tool for identifying the relative importance of causes, most of

which arise from only a few of the processes, hence the 80:20 rule. Pareto Analysis

is used to focus problem solving activities, so that areas creating most of the issues

and difficulties are addressed first.


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Some problems

Difficulties associated with Pareto Analysis:

Misrepresentation of the data.

Inappropriate measurements depicted.

Lack of understanding of how it should be applied to particular

problems.

Knowing when and how to use Pareto Analysis.

Inaccurate plotting of cumulative percent data.

Overcoming the difficulties

Define the purpose of using the tool.

Identify the most appropriate measurement parameters.


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Use check sheets to collect data for the likely major causes.

Arrange the data in descending order of value and calculate %

frequency and/or cost and cumulative percent.

Plot the cumulative percent through the top right side of the first

bar.

Carefully scrutinise the results. Has the exercise clarified the

situation?

In conclusion

Even in circumstances which do not strictly conform to the 80 : 20 rule the method is

an extremely useful way to identify the most critical aspects on which to concentrate.

When used correctly Pareto Analysis is a powerful and effective tool in continuous

improvement and problem solving to separate the vital few from the many other

causes in terms of cost and/or frequency of occurrence.

It is the discipline of organising the data that is central to the success of using Pareto

Analysis. Once calculated and displayed graphically, it becomes a selling tool to the

improvement team and management, raising the question why the team is focusing

its energies on certain aspects of the problem.

Pareto AnalysisSeven steps to identifying the important causes using Pareto Analysis [1]:

1. Form a table listing the causes and their frequency as a percentage.2. Arrange the rows in the decreasing order of importance of the causes, i.e. the most

important cause first.

3. Add a cumulative percentage column to the table.4. Plot with causes on x-axis and cumulative percentage on y-axis.

5. Join the above points to form a curve.

6. Plot (on the same graph) a bar graph with causes on x-axis and percent frequency

on y-axis.7. Draw a line at 80% on y-axis parallel to x-axis. Then drop the line at the point of

intersection with the curve on x-axis. This point on the x-axis separates the

important causes on the left and less important causes on the right.
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This is a simple example of a Pareto diagram using sample data showing the relative frequencyof causes for errors on websites. It enables you to see what 20% of cases are causing 80% of theproblems and where efforts should be focussed to achieve the greatest improvement.

The value of the Pareto Principle for a project manager is that it reminds you to focus on the 20%of things that matter. Of the things you do during your project, only 20% are really important.Those 20% produce 80% of your results. Identify and focus on those things first, but don't totallyignore the remaining 80% of causes.

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80Pareto analysis