Pareto Analysis - the 80/20 rule

In the 19th century, an Italian economist and philosopher Vilfredo Pareto, noted that most (80%) of the country’s wealth was owned by a relatively small proportion (20%) of the population, and after further work developed the Pareto Principle or 80/20 rule.

If we apply this to organisations we find; 80% of our sales come from 20% of our customers; 80% of our phone calls come from 20% of our colleagues; 80% of the complaints come from 20% of our customers; and so on. The ratio is rarely exactly 80/20; it could be 90/20, 70/10, etc.

The key point is that there are always the Vital Few and the Trivial Many. The more one applies Pareto, the more it seems to apply. In structured problem solving it is used to help to set priorities on which problems to tackle first - “to sort out the wheat from the chaff”. The earlier case study illustrated its use.

The general procedure (as applied to customer complaints) is:

Step 1 - Decide how data should be classified

Kind of Complaint
Time of Complaint
Person who received most Complaints.
Other

Step 2 - Use Checklist to collect data for a specified Time Period

Assume the team collected data by Kind of Complaint.

Complaint No

Response Time 43

Missing Part 12

Wasted Time 7

Didn’t stay fixed 15

Rude Staff 2

TOTAL 79

Step 3 - Arrange Data in Descending Order (largest down to smallest )

Complaint No Percentage Cumulative

Response Time 43 54% 54%

Didn’t stay fixed 15 19% 73%

Missing Part 12 15% 88%

Wasted Time 7 9% 97%

Rude Staff 2 3% 100%

TOTAL 79 100%

Step 4 - Plot Bar Chart

Draw vertical & horizontal lines and work-out appropriate vertical scale.
Construct Bar Chart with longest bar on the extreme left.
If desired, plot Cumulative Curve to illustrate Pareto Principle.

pareto histogram

Thus

Here 20 % of the items (Response Time) account for 54 % of the Complaints.
40% of the items (Response Time together with Didn’t stay Fixed) account for 73% of the Complaints.
60% of the items account for 88% of the Complaints.