Pareto chart analysis can be used to make business decisions. However, it has many applications in many different areas from the welfare economy to quality management. It is based on the “80-20 rule.” Pareto analysis is a statistical decision-making technique that separates the most important input factors, either desirable or unfavorable.
Pareto analysis is based on the belief that 20% of a project’s benefits can be achieved by doing 20% work. Or, in the opposite, 20% of problems can be traced back to 20% of their causes. Pareto analysis can be used to make powerful decisions and improve decision-making. It is, in the most basic sense, a method for obtaining the facts necessary to set priorities.
Steps to Pareto Analysis
The 80-20 rule allows problems to be classified based on their impact on profits, customer complaints, or technical issues. These issues are rated based on their impact on revenue, sales, time lost, or the number of complaints. This is a breakdown of the steps involved in Pareto analysis.
- Identify the problem/problems
- Identify the root cause of the problem or issues. There could be many causes
- You can score the problems by allocating a number to each one. This will prioritize the problem based upon its negative impact on company profitability.
- Group the problems in groups such as customer support or system problems
- To solve the problem, create and implement an action plan. Focus on the most important problems first.
Some problems won’t have high scores, and others may not be worth the effort. Companies can make it more efficient to allocate resources to issues with high impact or higher scores. This allows them to solve problems faster by focusing on the ones that have a significant impact on sales, profits, and customers.
How to create a Pareto Chart
Pareto analysis often includes graphically depicting the frequency of each variable being monitored. A Pareto chart is a visual representation that organizes and displays information to show the relative importance of different problems or causes of problems. Similar to a vertical bar chart, it places items in order (from highest to lowest) according to some measurable effect of the interest, such as frequency, cost, or time. This is how to make a Pareto graph.
- Create a list of problems that can be compared.
- A standard measure should be used to compare the items. It can be used to determine how frequently it happens (e.g. utilization, complications, and errors), how long it takes (time), or how much it costs (cost).
- Select a time frame for data collection.
- Add up the cost and time spent on each item. Add these amounts together to get the total sum for all items.
- Calculate the percentage of each item in grand total by adding the sum of all items, dividing it by grand total, then multiplying it by 100.
- The items to be compared should be listed in decreasing order according to their measure of comparison, e.g. the most frequent to the least. The cumulative percent of an item is the sum of the item’s percentage of the total and all other items preceding it in order by rank.
- From highest to lowest, list the items on the horizontal scale of a graph. The numbers (frequency, cost, time) should be labeled on the left vertical axis.
- The cumulative percentages should be labeled on the right vertical axis.
- For each item, draw the bars.
- Draw a line graph showing the cumulative percentages. The top of the first bar should be the first point on your line graph.
The analysis is the final step. Analyzing a Pareto chart will allow you to identify the most difficult items. The Institute for Healthcare Improvement has identified three critical types of errors during surgical setup in the example below.