What is a pareto chart?
A Pareto chart is a powerful tool that helps viewers understand which factors most influence outcomes. It’s based on the Pareto principle, which is that 80 percent of outcomes arise from 20 percent of causes. The chart helps to display this principle graphically.
The pareto principle
This principle is also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity. Joseph Juran publicized the concept in 1937 and named it after a famous economist, Vilfredo Pareto, who first recorded the phenomenon in the late 1800s.
Essentially, Pareto noted that in many places, the 80/20 distribution was common and existed in almost every facet of our lives. His original observation was in regards to population and wealth. He found that 80 percent of Italy’s land was owned by 20 percent of its population. Surveys across other countries revealed a similar distribution pattern.
This wealth distribution still holds true. The 1992 United Nations Development Program released a report showing that 20 percent of the world’s population generated around 80 percent of its income. This wildly unequal distribution has been found in taxation, income, and almost every other area of life.
Sports: Fifteen percent of baseball players create 85 percent of the wins, and it is theorized this applies across all sports. It is also said that 20 percent of training methods produce 80 percent of gains.
Computing: Microsoft found that fixing the 20 percent most commonly reported bugs resolved 80 percent of errors and crashes. That’s 20 percent of code holding 80 percent of the errors. Conversely, the trickiest 20 percent of coding takes 80 percent of a developer’s time.
Safety: Occupational health and safety professionals acknowledge that 20 percent of hazards cause 80 percent of injuries.
Health and Social Wellbeing: Twenty percent of patients use 80 percent of resources. Eighty percent of crimes are committed by 20 percent of criminals. The list goes on across all human attributes.
How the pareto principle applies in business
Just as the 80/20 rule applies for almost every scenario in the non-business world, it also applies in the business world. Eighty percent of sales are due to 20 percent of salespeople. Twenty percent of sales and marketing campaigns bring in 80 percent of the results. In a factory, 80 percent of the defects are the result of 20 percent of processes. Eighty percent of complaints are due to 20 percent of processes. Essentially, almost any aspect of business reflects this rule, and having a chart that displays figures helps an organization identify and resolve problems.
Basically, if you know 20 percent of something yields the most positive outcomes, you can pour more resources into it rather than wasting your time, energy, and money on something that will not help your organization. If your Pareto Chart shows that 80 percent of your business comes from Facebook advertising, then you know where you should focus your efforts.
When should a pareto chart be used?
A Pareto chart is ideal when:
- You need to easily communicate important issues to stakeholders
- There is a requirement to prioritize tasks
A Pareto chart needs to have data that can be measured in terms of duration, cost, or frequency. There also needs to be a timeframe in which the data occurred. The frequency of the data is represented on the left-hand axis, and the problem or other measurable is on the horizontal axis, represented in bars. The percentage curve represented by the line graph has a scale on the right-hand side.
To make it easier to understand, the 20 percent of data can be highlighted using a different color or labeled to indicate that it is the area of business that needs attention.
How to create a pareto chart
A Pareto chart, at its heart, is a column or bar chart overlaid with a line chart. The bars are displaying data that aligns to the left-hand scale, and the line shows the percentage of something on a scale up to 100 percent on the right-hand side.
For instance, if a business analyzed the age of electronics store customers who spent the most money, there would be a bar for each age. Pareto charts must always start with the biggest item on the left, with every bar afterwards from left to right in descending order. Then, the line graph will start on the bottom left and get cumulatively bigger until it reaches 100 percent on the top-right side of the chart.
In this same way, a manufacturing business could plot the frequency of their defect types. It quickly becomes clear that resolving production errors for one or two products will resolve a large volume of problems.
Alternatives to the pareto chart
While there are no real alternatives to the Pareto chart, there are a suite of seven basic quality-control tools that should be used together as part of a holistic way to address organizational issues:
- Cause and effect diagrams: identify causes of problems and put ideas into categories
- Check sheets: provide a structured way to collect and analyze data
- Control charts: study how a process changes over time
- Histograms: show frequency distributions such as how often a value in a set of data occurs
- Pareto charts: show the significance of factors
- Scatter diagrams: identify relationships and patterns
- Stratifications: separate data and identify patterns
Used together, these tools form the basis for ensuring organizational quality.
Benefits of a pareto chart
Focuses problem solving
If you have 100 products on an assembly line and a range of faults, flaws, and problems, how does an organization know what to resolve first? A Pareto chart immediately shows the biggest problem, and therefore the process or product that needs to be resolved first. If one faulty part is causing most of the problem, it becomes easy to prioritize the fix.
While you can see defects and problems, Pareto charts can also be used to identify strengths. From there, you can make plans to exploit them. For instance, you can ask the top salesperson or the best branch about their practices so they can be replicated. Or, if a team is particularly effective, their techniques and methods can be replicated throughout the business.
Empowers decision making
Leadership teams want to make the best choices for their organizations, but it can be tough to understand what will make the biggest impact. Aside from machine learning and artificial intelligence, the most useful tool could be a Pareto chart. Being able to clearly see where the biggest benefits—or problems—arise means you can make targeted decisions that are effective and grounded in data.
Disadvantages of pareto charts
No root-cause analysis
While the Pareto chart shows the outcomes, there is no clear way to see the cause behind the data. For instance, if a particular branch of a company performs very well, there is no way to easily understand in the chart why this is the case.
Solution: Once the analysis and figures are done, a full investigation needs to be carried out that shows how these outcomes occurred. Why did the branch perform well? Why does the factory consistently break one certain part when constructing the product?
No quantitative data
A Pareto chart is purely qualitative. There is no indication of the severity of a defect or a problem. Discovering that information requires a thorough investigation and analysis of the problem.
Only shows past data
A Pareto chart only shows past data. The damage or problems have already occurred and cannot be changed. Also, there is no way to truly predict if changes made based on this data will result in the positive results required. For instance, using machine learning will also help with predictions; if you change X, then Y will also be affected.
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