Pareto Analysis

What Is the Pareto Analysis?

Have you ever heard of the 80/20 rule? It is the phenomenon that 80% of consequences come from 20% of the causal factors. This principle, discovered in the early 20th century, is the basis for Pareto Analysis which helps organizations determine which factors have the greatest impact on any given subject.

This phenomenon can be seen in action across multiple areas of study like ecological environments, societal structures, work time management, and even language.

To wrap our minds around the idea, here are a few quick examples of the 80/20 rule in action:

• 80% of work is performed during 20% of the total work time.
• 80% of sales revenue comes from 20% of clients.
• 80% of problems can be traced to 20% of defects.

Pareto Analysis helps businesses prioritize the key factors of failures and successes. If 80% of problems are caused by 20% defects, then by focusing on fixing those specific defects, you can create the most positive change. Likewise, if 80% of sales revenue is coming from 20% of clients, then it is beneficial to keep those clients.

The important question is, how do you find the right 20%?

Brief History of the Pareto Analysis

Pareto Analysis was named after Italian economist Vilfredo Pareto. In 1906, he observed that approximately 80% of the land in Italy was owned by 20% of the population. Upon seeing this distribution, he traveled across Europe and observed the same unequal distribution of wealth. He called this the 80/20 Rule. To Pareto, the 20%, or the powerful minority, is referred to as the Vital Few.

In 1937, American business theorist Joseph Juran discovered Pareto’s research and renamed the 80/20 rule to Pareto’s Principle of Unequal Distribution. He then applied this principle to the business world, focusing on the idea that if companies focus on the Vital Few, they can positively impact 80% of their operation and business.

Will It Always Be An 80/20 Split?

In short, no.

The Pareto Principle is merely an observation of common levels of unequal distributions. The most common of these distributions is the 80/20 split but by no means is this a rock-solid figure. You could have a case where 40% of processes are contributing to 60% of non-conformance issues. Or that 30% of workers are responsible for 70% of results.

So why use the Pareto Principle?

Because this doesn’t change the underlying principle: the minority often has the greatest impact over the majority.

Since the Pareto Principle is not a hard and fast rule, Pareto Analysis is used as a guide to help people and companies focus on the right determining factors within their operation. The outcomes may not be a perfect 80/20 split, but it will show you which factors are contributing the most to the effect.

How to Perform Pareto Analysis

Pareto analysis is the process whereby problems or successes are identified and prioritized. By looking through the proverbial Pareto lens, businesses can focus on fixing the issues or enhancing the successes that have the greatest impact.

For example, if a company is experiencing a high number of defects, they can determine the greatest contributing factors by following these 4 steps.

• Step 1: Identify the total defects that are affecting the operation.
• Step 2: Compile a list of all defects with their frequency in a given time frame.
• Step 3: Sort them in descending order, from largest to smallest.
• Step 4: Calculate the cumulative percentage of each defect regarding the total number of defects.

To put these steps into action, imagine a scenario where you run a toy car factory that fabricates high-end electronic wooden car models. Business is good but there’s a problem. In the past year, you’ve had a total of 994 defects. That’s an average of nearly 4 defects per working day. Something needs to be done!

Thankfully, you’ve recorded all defects over the past year. By following the above steps, you’ve built a table outlining the identified defects, the total number of defects, the cumulative number of defects, and the cumulative percentage of defects.

So here we can see you have 4 defects (highlighted in green) that account for approximately 80% of the total defects. By focusing your efforts specifically on this 20% of defects, you can theoretically eliminate 80% of the total defects.

Another way of reducing worker related defects is through work instruction software. With comprehensive and visual guides, workforce-related defects are reduced by up to 95%!