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Solve 80% of Your Problems With Pareto Analysis

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This post is part of a series called Get to the Root Cause of Management Problems.
Uncover Deep-Rooted Business Problems With Five Whys

It was 1906. Italian economist Vilfredo Pareto, in the course of researching his ideas, made an interesting observation. 80% of the land in Italy, he discovered, was owned by just 20% of the people. Exploring this relationship in other countries, he found that the situation was the same all over Europe. Over time, he became aware that this 80/20 split was not limited to landowners—or even to human affairs. In fact, he found, 20% of the pea pods in his garden produced 80% of the peas he harvested!

Forty years after Pareto published his ideas, business theorist Joseph Juran stumbled across the 80/20 rule, and wondered if it could be applied to business situations. Could it be that 80% of business problems were generated by just 20% of the related causes? Of course, the answer was a resounding “yes.”

Juran, building on Pareto’s work, began to apply what he called the Pareto principle to quality issues, using the phrase "the vital few and the trivial many." Later, Juran realized that while a small percentage of causes or issues might be most significant today, there are real implications for the 80% of problems which could, over time, become serious. Thus, in his later years, Juran changed the phrase describing the Pareto principle to "the vital few and the useful many."

The Pareto principle has become an extraordinarily useful tool to business managers in every industry. What are the most important issues to address? How can we make a serious dent in customer service problems? How can we quickly resolve some of our biggest concerns? The Pareto principle provides the overall strategy for moving forward—that is: find the 20% of issues that are causing 80% of the problems, and then solve them. The Pareto chart and Pareto graph, tools for finding and visualizing statistical information, are the means used to put the Pareto principle to work. 

 The Pareto Principle Applied

It turns out that the Pareto principle has a wide range of applications—both in management and in other aspects of business, economics, mathematics, and daily life. In 1992, the United Nations Development Program Report announced that 20% of the world’s population enjoys 80% of the world’s wealth and resources. Studies show that 80% of a company’s profits come from 20% of its customers, and 80% of sales are made by 20% of its sales staff. Microsoft found that 20% of bugs cause 80% of crashes, and safety experts learned that 80% of injuries are caused by 20% of hazards. In addition, according to the British NHS Institute for Innovation and Improvement:

  •  80% of interruptions come from 20% of the people.
  •  80% of an equipment budget comes from 20% of the items.
  •  80% of benefit comes from the first 20% of effort.
  •  80% of complaints are about 20% of your services.
  •  80% of a nurse's time is spent on 20% of the patients.
  •  80% of the decisions made in meetings come from 20% of the meeting time.
  •  80% of innovation comes from 20% of the staff.
  •  80% of staff problems come from 20% of the staff.
  •  80% of your success comes from 20% of your efforts.

By now, you are probably brainstorming some of the problems you could solve by applying the Pareto principle to your own workplace. For example:

  • You could identify which 20% of technologies are causing 80% of the headaches in your department.
  • You could sort out which 20% of customer service issues are leading to 80% of complaints.
  • You could point out the 20% of problems that are leading to 80% of missed deadlines.

The Pareto principle and Pareto charts are used every day to achieve such diverse goals as improving efficiency on a production line, increasing sales for a consulting firm, decreasing wait time for patients in a hospital, and fixing the most significant bugs in a software product.

How to Conduct a Pareto Analysis

Step 1: Cause and Effect Analysis

Most of the time, Pareto analysis is used to determine which issues cause the most problems (or which causes lead to the greatest positive outcomes). But the analysis is not performed in a vacuum: you can’t compare problems or causes until you’ve actually brainstormed a list of problems and causes. And most companies do that kind of brainstorming through root cause analysis and/or cause and effect analysis. Thus, the first step in conducting a Pareto analysis is to conduct a root cause analysis to generate a list of candidate problems or causes to analyze.

Step 2: Score Candidate Problems

Once you have your list, you can begin the process of conducting your 80/20 analysis. You’ll start by scoring the problems or causes you’ve listed. This sounds complex, but it’s actually a fairly straightforward process in most cases. For example:

  • If your problems relate to profits, score each problem based on the amount of profit lost as a result.
  • If your problems relate to customer satisfaction, score each problem based on the number of complaints associated with it.
  • If your problems relate to delays, score each problem based on the amount of time lost as the result of the problem.
  • If your problems relate to bugs or production glitches, score each problem based on the number of processes affected by the bug or glitch.

Let’s illustrate this concept with a simple example. Imagine that your team has decided to address the issue of missed deadlines for the production of marketing materials. 

Through root cause analysis, they’ve discovered that the causes for the problem include office distractions, software glitches, communication delays between departments, delays in getting approvals from upper management, and production delays caused by problems with the printing company. Since the issue you’re addressing relates to time, you’ll score each item based on the amount of delay they cause.

Step 3: Create a Pareto Chart

You’ll need to do a little research to be sure your information is correct, and then you’ll create a scoring chart that looks something like this (for a six week project): 

  • Office distractions (parties, chatting, etc.) – 6 hours/week = 36 hours.
  • Software glitches – 4 hours/week = 24 hours.
  • Communication delays between departments – 10 hours/week = 62 hours.
  • Approval delays – 3 hours/week = 18 hours.
  • Production delays – two weeks = 80 hours.

Because this example is so simple, it’s immediately obvious that production and communication between departments cause far more delays than any other problem. The solutions are probably self-evident: it’s time to find a new printer for your marketing materials, and it would be a good idea to develop a more streamlined process for communicating among departments.

Step 4: Create a Pareto Graph

But what if your list was very long or you just wanted to present your findings in visual form to decision makers? Many people recommend turning your list of data into a bar chart with the biggest problems at the left of the chart and the smallest problems at the right of the chart. 

You then add a line graph showing the cumulative percentage total reached with the addition of each problem represented in the chart. The line should end at the 100% mark on the right axis. Also add a bold line indicating at what point you've reached 80% cumulative percentage—everything to the left of that line are your 20% vital few problems to focus on, while the remainder on the right are trivial.

Here’s what that would look like for this example analysis: 

Pareto Graph example of missed deadlines for the production of marketing materials.

Armed with your scoring chart, your bar chart and your trend line, you’re ready to take on 20% of your problems, and improve your outcomes by 80%!

Pareto Analysis in the Real World

How well does Pareto analysis really work? In many cases, it has helped managers to vastly improve outcomes with relatively little effort—thus improving the bottom line and their own image at the same time.

At the Santa Rosa Health Center, Pareto analysis allowed managers to analyze nearly two dozen problems that had been identified as causing long wait times. Once they had listed the problems, they surveyed Center patients and staff to name their top five concerns. The group scored each item based on survey results, and then organized the problems based on score. They discovered that just six problems could be considered “vital,” while the remainder were “trivial.” They were then able to identify their six top issues, thus shortening wait time by 80%.

Of course, Pareto analysis doesn’t solve problems: it only identifies them. In order to actually move forward to address their “vital” problems, the health center had to use their findings to create an action plan—and then implement that plan. 

As a part of the Six Sigma quality program, Pareto analysis is only one step along the path to success. But without Pareto analysis, it’s likely that you’ll wind up spending 80% of your time, effort and resources to achieve just 20% of the outcome you’re hoping for.

Resources

Graphic Credit: Saw designed by Scott Lewis from the Noun Project.


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