Pareto principle

   Observation that where a large number of factors or agents contribute to a result, the
majority (about 80 percent) of the result is due to the contributions of a minority (about
20 percent) of factors or agents. Investigations suggest, for example, that some 80 percent
of the sales of a firm are generated by 20 percent of its customers, 80 percent of the
inventory value is tied up in 20 percent of the items, 80 percent of problems are caused
by 20 percent of reasons. It is however a heuristics principle, and has not been proved as
a scientific law. Named after its proposer Vilfredo Federico Damaso Pareto (1848-1923),
French-born Italian engineer and a founder of welfare economics. Also called 80/20
principle, Pareto's Law, or principle of imbalance.

Pareto chart
A Pareto chart, also called a Pareto distribution diagram, is a vertical bar graph in which values
are plotted in decreasing order of relative frequency from left to right. Pareto charts are
extremely useful for analyzing what problems need attention first because the taller bars on the
chart, which represent frequency, clearly illustrate which variables have the greatest cumulative
effect on a given system. 

The Pareto chart gets its name from Vilfredo Pareto, an Italian Economist. In 1906, Pareto noted
that 20% of the population in Italy owned 80% of the property. He proposed that this ratio could
be found many places in the physical world and theorized it might be a natural law, where 80%
of the outcomes are determined by 20% of the inputs. 

In the 1940s, Pareto’s theory was advanced by Dr. Joseph Juran, an American electrical engineer
who is widely credited with being the father of quality control. It was Dr. Juran who decided to
call the 80/20 ratio the "The Pareto Principle." Applying the Pareto Principle to business metrics
helps to separate the "vital few" (the 20% that has the most impact) from the "useful many" (the
other 80%). The chart illustrates the Pareto Principle by mapping frequency, with the assumption
that the more frequently something happens, the more impact it has on outcome.  

The Pareto chart is one of the seven basic tools of quality control. The independent variables on
the chart are shown on the horizontal axis and the dependent variables are portrayed as the
heights of bars. A point-to-point graph, which shows the cumulative relative frequency, may be
superimposed on the bar graph. Because the values of the statistical variables are placed in order
of relative frequency, the graph clearly reveals which factors have the greatest impact and where
attention is likely to yield the greatest benefit.

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A Simple Example
A Pareto chart can be used to quickly identify what business issues need attention. By using hard
data instead of intuition, there can be no question about what problems are influencing the
outcome most. In the example below, XYZ Clothing Store was seeing a steady decline in
business. Before the manager did a customer survey, he assumed the decline was due to
customer dissatisfaction with the clothing line he was selling and he blamed his supply chain for
his problems. After charting the frequency of the answers in his customer survey, however, it
was very clear that the real reasons for the decline of his business had nothing to do with his
supply chain. By collecting data and displaying it in a Pareto chart, the manager could see which
variables were having the most influence. In this example, parking difficulties, rude sales people
and poor lighting were hurting his business most. Following the Pareto Principle, those are the
areas where he should focus his attention to build his business back up. 

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Pareto Analysis Step by Step

Pareto Analysis is a statistical technique in decision making that is used for the selection of a
limited number of tasks that produce significant overall effect. It uses the Pareto Principle (also
know as the 80/20 rule) the idea that by doing 20% of the work you can generate 80% of the
benefit of doing the whole job. Or in terms of quality improvement, a large majority of problems
(80%) are produced by a few key causes (20%). This is also known as the vital few and the
trivial many.

In the late 1940s quality management guru Joseph M. Juran suggested the principle and named it
after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20%
of the population. Pareto later carried out surveys on a number of other countries and found to
his surprise that a similar distribution applied.

The 80/20 rule can be applied to almost anything:

 80% of customer complaints arise from 20% of your products or services.

 80% of delays in schedule arise from 20% of the possible causes of the delays.
 20% of your products or services account for 80% of your profit.
 20% of your sales-force produces 80% of your company revenues.
 20% of a systems defects cause 80% of its problems.

The Pareto Principle has many applications in quality control. It is the basis for the Pareto
diagram, one of the key tools used in total quality control and Six Sigma.

In PMBOK Pareto ordering is used to guide corrective action and to help the project team take
action to fix the problems that are causing the greatest number of defects first.

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Pareto Analysis
Seven 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.

This is a simple example of a Pareto diagram using sample data showing the relative frequency
of causes for errors on websites. It enables you to see what 20% of cases are causing 80% of the
problems 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 totally
ignore the remaining 80% of causes.

Methods & Tools

QA Resources
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Pareto Chart

In QI a Pareto chart provides facts needed for setting priorities. It organizes

and displays information to show the relative importance of various
problems or causes of problems. It is essentially a special form of a vertical
bar chart that puts items in order (from the highest to the lowest) relative to
some measurable effect of interest: frequency, cost, time. The chart is based
on the Pareto principle, which states that when several factors affect a
situation, a few factors will account for most of the impact. The Pareto
principle describes a phenomenon in which 80 percent of variation observed
in everyday processes can be explained by a mere 20 percent of the causes
of that variation.

Placing the items in descending order of

frequency makes it easy to discern those
problems that are of greatest importance
or those causes that appear to account
for most of the variation. Thus, a Pareto
chart helps teams to focus their efforts
where they can have the greatest
potential impact.

When to Use It

Pareto charts help teams focus on the

small number of really important
problems or causes of problems. Pareto charts are useful in establishing
priorities by showing which are the most critical problems to be tackled
or causes to be addressed. Comparing Pareto charts of a given situation
over time can also determine whether an implemented solution reduced
the relative frequency or cost of that problem or cause.

How to Use It

Step 1. Develop a list of problems, items, or causes to be compared.

Step 2. Develop a standard measure for comparing the items.

 How often it occurs: frequency (e.g., utilization, complications, errors)

 How long it takes: time
 How many resources it uses: cost

Step 3. Choose a time frame for collecting the data.

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Step 4. Tally, for each item, how often it occurred (or cost or total time it
took). Then add these amounts to determine the grand total for all items.
Find the percent of each item in the grand total by taking the sum of the
item, dividing it by the grand total, and multiplying by 100.

Tallying Items in a Compilation Table

Number of Percentage
Causes for Late Occasions
Arrival

Family problems 8 11

Woke up late 20 27

Had to take the 4 6

bus

Traffic tie-up 32 44

Sick 6 8

Bad weather 3 4

Total 73 100
Step 5. List the items being compared in decreasing order of the measure of
comparison: e.g., the most frequent to the least frequent. The cumulative
percent for an item is the sum of that item’s percent of the total and that of
all the other items that come before it in the ordering by rank.

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Arranging Items in a Compilation Table

Number of Percentage Cumulative

Causes for Late Occasions Percentage
Arrival
(Decreasing
Order)

Traffic tie-up 32 44 44

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 Woke up late 20 28 71

Family problems 8 10 82

Sick 6 8 90

Had to take the 4 6 96

bus

Bad weather 3 4 100

Step 6. List the items on the horizontal axis of a graph from highest to
lowest. Label the left vertical axis with the numbers (frequency, time, or
cost), then label the right vertical axis with the cumulative percentages (the
cumulative total should equal 100 percent). Draw in the bars for each item.

Step 7. Draw a line graph of the cumulative percentages. The first point on
the line graph should line up with the top of the first bar.

Step 8. Analyze the diagram by identifying those items that appear to

account for most of the difficulty. Do this by looking for a clear breakpoint in
the line graph, where it starts to level off quickly. If there is not a
breakpoint, identify those items that account for 50 percent or more of the
effect. If there appears to be no pattern (the bars are essentially all of the
same height), think of some factors that may affect the outcome, such as
day of week, shift, age group of patients, home village. Then, subdivide the
data and draw separate Pareto charts for each subgroup to see if a pattern
emerges.