What is the Pareto Principle? •
The Pareto Principle is named after a famous Italian economist Vilfredo Pareto.
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He noted this principle when he looked at the economic state of the Italian Population.
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He found that 80% of the wealth in Italy was owned by 20% of the people.
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This survey was then carried out in several other countries where the results showed a similar distribution. Vilfredo Pareto
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What is 80/20 rule? •
The Pareto Principle It is called 80/20 rule because in most situations 80% of the outcome is driven by 20% of the causes (“vital few”)
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For example, In the US, it was noted that 80% of the taxes were paid by 20% of earning population. In several businesses, 80% of the sales come from 20% of the customers. 80% of the problem is driven by 20% of issues
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Where is Pareto principle used?
Quality control
Business decisions
Prioritization
80% of the problems in context can be solved by focusing on 20% of the issues.
To improve productivity, time management and customer satisfaction
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What is Pareto chart? •
A Pareto chart is a graphical representation of the Pareto Principle.
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It is a combo Bar and a Line chart.
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The Bar shows the individual contribution of each element in a descending order and the line shows the cumulative percentage of all elements.
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This chart helps focus on “vital few” elements for improvements.
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Pareto chart – Example (1/6) •
A restaurant conducted a survey with its customers
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The management wanted to understand the reasons for its falling sales.
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The survey was conducted with 1000+ customers. The feedback given around multiple improvement levers which were categorized in 8 broad heads.
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Pareto chart – Example (2/6) Step 1 – Arrange the data in descending order.
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To arrange the data in descending order in excel, click on the Table. Then click on the Data Tab and select Sort. Select Largest to smallest.
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Pareto chart – Example (3/6) Step 2 – Calculate the cumulative percentage of Customer Complaints
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Now, Insert two columns. One for calculating the cumulative number of customer complaints Second to calculate the cumulative percent of customer complaints (as shown below).
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Pareto chart – Example (4/6) Step 3 – Insert a Combo/Pareto chart •
To insert a chart, press the control key and select the chart data (the first, second and fourth column here).
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Now go to insert, and in the chart section click on the recommended charts and then on All Charts.
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From the chart list, select combo chart.
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We see that the # customer complaints are a clustered column chart and the Cumulative percent is a line chart.
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Pareto chart – Example (5/6) Step 3 – …Contd.
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Click on the secondary axis for the cumulative percent (%) to get the following chart.
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Format the chart as required Remove chart border Add chart title Add data labels
Pareto chart – Example (6/6) Now to show the Pareto analysis, draw a line at 80% on the secondary y-axis to the point where it intersects the cumulative percent series. From the intersection point draw another line vertically and connect it to the x-axis (as shown below). • This analysis shows, that 80% plus customer complaints can be resolved by focusing on just 2 issues (Vital Few). Price and Serving size.
Vital Few
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