Tools & Techniques - Pareto Charts

Abstract

Vilfredo Pareto was an Italian economist credited with establishing the Pareto Principle. Pareto charts provide facts and insights necessary for setting priorities. Pareto charts assist teams to focus on the smaller number of the causes of problems in order to aid in decision making. Pareto charts organize and display information. They are a form of vertical bar chart. Attributes are discussed. Suggestions on when to use a Pareto chart are made. Pareto analysis is one way to determine major causes of particular problems. A review is provided with suggestions for alternatives. The Pareto chart is a valuable decision making tool.

Tools & Techniques

Pareto Charts

As a decision-making tool, the Pareto chart provides facts and insights necessary for setting priorities. Vilfredo Pareto was an Italian economist credited with establishing what is now widely known as the Pareto Principle. It is also known as the "80/20 Rule" (iSixSigma, 2006). When Pareto discovered the principle in 1906, he established that 80% of the land in Italy was owned by 20% of the population. Later, Pareto discovered his principle was valid in other parts of his life, such as gardening. For example, 80% of his garden peas were produced by 20% of the peapods.

The "80/20 Rule is not literal. The ratios may vary. Rather than an even 80% to 20% ratio the exact percentage may be 82% to 18%, or 78% to 22%. However as a 'rule of thumb' it is common practice to refer to an 80% to 20% ratio. On their website showing examples of the Pareto charts and the 80/20 Rule, iSixSigma provides several examples of common applications for the 80/20 Rule"

80% of process defects arise from 20% of the process issues.

20% of your sales force produces 80% of your company revenues.

80% of delays in schedule arise from 20% of the possible causes of the delays.

80% of customer complaints arise from 20% of your products or services.

Pareto charts assist teams to focus on the smaller number of the causes of problems in order to aid in decision making. However paraphrased; a Pareto chart is a simple management tool with broad business applications. Pareto charts organize and display information to show the relative importance of various problems. It is essentially a special form of a vertical bar chart that puts items in order from the highest to the lowest relative to another measurable quantity such as frequency, cost, or time.

Placing the items in descending order of frequency makes it easy to discern problems that are of greatest importance or those causes that appear to account for most of the variation. Thus, a Pareto chart helps individuals or teams to focus their efforts where they can have the greatest potential impact.

Pareto charts are useful in establishing priorities by showing which are the most critical problems to be tackled or causes to be addressed. Comparing Pareto charts of a given situation over time can also determine whether an implemented solution reduced the relative frequency or cost of that problem or cause. Trends can be observed.

A Pareto Chart is basically a vertical bar graph showing problems in a prioritized order, so it can be determined which problems should be tackled first. When making decisions it is often useful to make Pareto Charts of data collected over a set time period. The first step would be to list the problems identified for a particular problem. Data is collected for the variable elements of the units to be measured and displayed. New or existing data are grouped by consistent units of measure.

The attributes to be charted are arranged so as to fall under one category only. Units of measure are labeled and displayed on the left vertical axis. The categories are labeled and displayed on the horizontal axis. Categories are plotted according to frequency, starting from the vertical axis using the highest numbers first. Categories that appear infrequently are grouped under "other" to avoid confusion.

The Coast Guard Process Improvement Guide (2006) cautions "measurement units can significantly affect" a Pareto chart. The same units of measure must be used. They should be clearly marked. Also the "other" category, if used, should be "no more than 25%" of the data.

When to Use a Pareto Chart

Pareto charts are typically used to prioritize competing or conflicting "problems," so that resources are allocated to the most significant areas. They can be used to determine which of several classifications have the most value or cost associated with them. An example would be the number of people using the various outdoor ATM's versus each of the indoor teller locations. Another example would be the number of times an employee or group of employees were tardy and/or absent. The important limitations are that the data must be in terms of either counts or costs. The data can not be in terms that can't be added, such as percent yields or error rates.

"Count data" is also referred to as "attribute data'. Typically, a person will count the number of times a condition is observed in a given sample from the process. It is different from measurement data in its resolution. Attribute data has less resolution, since there would be a count only if something occurs rather than measuring the event being observed. For example, attributes data for absenteeism might include the number of times an employee was late for work, whereas variables data for the same process might be the measurement