Pareto Chart: What, When, and How to Use It
Vilfredo Pareto was an Italian civil engineer, sociologist, economist, and philosopher who was born in 1848 in Paris. He made major contributions in the field of economics, particularly in microeconomics and socioeconomics. As the head of political economy in the University of Lausanne, Switzerland, he observed that 20 percent of the population owned 80 percent of the property in Italy.
Joseph Juran, an American engineer and quality management consultant born in 1904, came across the works of Pareto in 1941 and further generalized Pareto’s observation. He named it the Pareto principle, which also became known as the 80/20 rule. Dr. Juran applied the principle to quality issues. For example, he showed that 80 percent of defects are the result of 20 percent of mistakes.
The Pareto principle is a form of mathematical distribution that shows a relationship between two quantities. In this relationship, a relative change in one quantity results in a proportional relative change in the other quantity. These quantities, changes, and their relationship can be shown in a Pareto chart.
This chart is one of the seven basic tools of quality. Others include the cause-and-effect/fishbone/Ishikawa diagram, the check sheet, and the control chart. These graphical tools and techniques were introduced by Kaoru Ishikawa in the 1950s for troubleshooting issues related to quality.
A Pareto chart is a type of bar chart that often includes a line graph. The length of the bars are shown in units at the left vertical axis, and they typically represent frequency of occurrence, but can also be another unit of measure. The bars are arranged such that the longest bar appears on the left and the shortest bar is on the right. So, you can immediately see the most significant data and how much it contributes to the overall situation.
The right vertical axis can represent the cumulative percentage of the total number of occurrence, or other total with a maximum of 100 percent. The line graph shows the cumulative total as it adds the value of each bar and compares it to the cumulative percentage at the right vertical axis.
The Pareto principle or 80/20 rule is a generalization and does not distribute at an exact 80:20 ratio. However, it provides an accurate direction or trend for many applications that can be quickly shown in a Pareto chart. Some of those applicants are:
- In terms of quality, a greater percentage of problems come from a smaller percentage of defects.
- In project management, a greater amount of effort is usually spent on a smaller number of tasks.
- In sales, a greater percentage of revenue comes from a smaller percentage of customers.
- In support, a greater number of complaints come from a smaller number of customers.
- In finance, a greater percentage of funding is provided by a smaller percentage of investors.
- In marketing, a greater percentage of traffic is generated by a smaller number of posted articles.
A Pareto chart is a good tool to use when you want to analyze problems or causes in a process that involves frequency of occurrence, time, or cost. It is also a valuable tool when you are dealing with a list of problems, and you want to focus on the most significant ones.
The chart can be helpful when you want to analyze a problem with a broad range of causes so you can identify specific components. As a visual tool, it is a great way to communicate and share your data and be understood quickly by others.
How to build a Pareto chart
Step 1. Decide if a Pareto chart is the right analysis tool for your particular problem. Otherwise use another tool.
Step 2. Group the causes or factors into specific categories.
Step 3. Choose the appropriate measurement. (ex. frequency, quantity, cost)
Step 4. Define the period of time your chart will cover. (ex. hour, day, week)
Step 5. Use the data collected and compute the subtotals for each category.
Step 6. Adjust the scale of your left axis to accommodate the largest subtotal from the different categories.
Step 7. Construct your bars, with the tallest bar at the far left, and the shortest bar at the far right.
Step 8. Compute the percentage of each subtotal category, dividing them by the total of all categories that represent 100 percent as indicated by the right vertical axis.
Step 9. Compute the cumulative sums, starting from the far left going to the right, and draw the line graph representing the sums against the percentage of the right vertical axis.
Project management use cases for Pareto charts
Aside from analyzing economics and quality issues, the Pareto principle and a Pareto chart can be useful in project management and productivity.
You can use it to analyze task lists and prioritize the few important ones that will have the most significant results. You can also prioritize and allocate more time to the 20 percent that are longer to complete over the remaining 80 percent. When assessing risks, look at the 20 percent with the highest negative impacts and prepare better for them.
In the early days, the 80/20 rule is also sometimes referred to by Dr. Juran as the rule of “the vital few and the trivial many.” However, over the years, he later changed it to “the rule of the vital few and the useful many.” The emphasis may be on the significant 20 percent, but it is a mistake to ignore the remaining 80 percent.