Pareto Principle

The Pareto Principle describes that 80% of problems can be closed with 20% of the causes. This principle is named after Vilfredo Pareto who found out that 80% of Italy’s wealth belonged to 20% of the population.

With this in mind it is worth to have a look at it.

Let us start with an assumption, according to the Pareto Principle it allows us to assume that

• 20% of input creates 80% of the output

• 20% of customers create 80% of your revenue

• 20% of causes create 80% of failures

• 20% of your employees create 80% of sales

• and so on…

But before you run away now and think you have the answer hold a second. With the 80/20 rule you might tend to say that it always have to be 100 - it’s not. Make a deep analysis before making such statements! 20% of your employees can also make only 20% of sales or 60%. So before you fire 80% of your employees keep in mind that the Pareto Principle only gives you an idea on the distribution.

The whole idea behind it is that most things in life are not distributed evenly!

When we talk about value adding activities and the final product is 100% What is with all the necessary tasks, that are not adding any value to the final product but have to be done to run the company.

Or think about failures and finding the root cause, where to start to take actions? This is great when you think about a Failure Pareto and you want to satisfy your customer as quick as possible. Of course you are focusing first on the most failures and most of the time - not always - the other failures will disappear as well.

But most important of all, your customer gains trust in you that you have the competencies to do the job.

The key point is that most things are not in a 1/1 actio = reactio relationship.

So what can we use it for this 80/20 rule?
The Pareto Principle in first place supports you on realizing that most of the outcome are based on a minority of inputs. This means:

• 20% of input creates 80% of the output > try to reduce those non value adding activities

• 20% of customers create 80% of your revenue > install a key account manager that the customers knows he/she is important to your company > your customers success is your companies success

• 20% of causes create 80% of failures > Focus on fixing those failures first

• 20% of your employees create 80% of sales > get those employees a reward

We could continue on and on. To bring it to the point > focus on the 20% and not on everything at the same time.

Some examples that might help you for a better understanding:

• Instead of spending a whole night to prepare a presentation and thinking about where to start > focus on one topic and do it. You will get a feedback anyway during the pitch. This feedback gives you the chance to take it and improve it.

• Instead of focusing on one solution that might be the best and go through all the details. Make a list of three and go through the pros and cons with your colleagues that probably know the topic better anyway and based on their opinion make a decision with what to go on.

Maybe this examples are nuts for you but we want to emphasize that you should focus only on the important 20% and forget - for the moment - the other 80.

Last but not least - the Pareto Principle is not a law of nature it is a guideline to steer your focus and to save time on problem solving or simply getting your job done faster.

Pareto Chart

A pareto chart is used in order to determine the waste characteristics of a product/good but also of processes. They are sorted onto a cart so that the most frequent defects can be visualized and stand at first place.

Today, I am writing this blog post after discussing several times with colleagues who want to understand the Pareto chart (or Pareto diagram) more deeply.

The Pareto chart is one of the basic tools of quality management. Usually, this chart consists of a combined bar and line graph. The vertical bars are representing the quantity of defects, and the line represents a cumulative percentage of the defects.

The descending order of bars is from left to right. The bar on the left will have the highest value, and the bar on the right side will have the lowest value.

Let’s discuss this in detail.

Pareto Chart

Sometimes, it is challenging for you to understand the problems and their causes. Instead of focusing on the root cause, you spend your time, solving problems, which were influencing the project least.

The Pareto diagram can help you overcome this situation. The Pareto diagram can help you segregate the defects and their cause. Once you get this info, you can focus on the cause which is generating the most defects.

The Pareto diagram is based on the Pareto Principle, which was developed by an Italian economist named Vilfredo Pareto. He found out that 80% of the wealth was spread to 20% of the population. Therefore, pareto is also known as the 80/20 rule.

We could now list several examples where this rule is confirmed such as

80% of the defects are coming from 20% of the process

or

80% of customer complaints are coming from 20% of all defects detected

or

20% of the defects are causing 80% of the problems…

The list can go on and on.

In general, this phenomenon can be interpreted as follows: Roughly 80% of the problems will be due to 20% of the causes, or the majority of issues will be due to a small number of causes.

However, keep in mind that the above rule is a general rule and the ratio is not absolute.

The Pareto chart is mainly used in quality management or Six Sigma approaches. This chart helps you to find the majority of the problems and their root causes. You then should focus on tackling those causes and therefor solve the majority of the problems.

How to Draw a Pareto Chart

Drawing a Pareto chart is very simple. The most important step is to collect the correct data.

The steps to drawing a Pareto chart are as follows:

• Categorize your potential causes

• Specify the measure, e.g. quantity, costs per failure, downtime, etc.

• Set a time frame you measure, e.g. per shift, per week, etc.

• Measure Measure Measure (If you can’t measure you can’t control)

• Separate the data based on the categories

• Draw a bar chart with causes on horizontal axis and number of occurrences on the vertical axis (Excel gives you predefined templates)

• The category with the lowest quantity will be at the right and the highest quantity on the left

If you don’t have the histogram preset chart in excel - define a second row with the percentage value. Accumulated up to 100%. This will be your secondary axis. The values in percent will form the curve of distribution.

.To make it short - it should look like this:

Pareto Chart

Now, you can focus on the causes generating the majority of problems, analyze them, find their real root cause(s), and start to get rid of the issues one by one.

This chart can help everybody to identify causes of the most common problems. It also supports on prioritizing tasks and activities for KAIZEN Workshops or simply fire fighting. Having some Excel skills, it is very easy to create a Pareto and also often helpful communicating your actions to the upper management - you can bring it to the point.

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This reading pick is not focusing on the professional approach of the Pareto (meaning quality matters in manufacturing) but more looking at the personal usage of the 80/20 Rule. We love it as it shows you how to focus on what really matters in live.

Read more in our reading picks here.