Understanding the Pareto Principle (80/20 Rule)
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.
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Vilfredo Pareto
What is 80/20 rule?
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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
for improving productivity, time management and customer satisfaction 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.
• The Bar shows the for improving productivity, timeindividual management and customer satisfaction contribution of each element in a descending order and the line shows the cumulative percentage of all elements. •
This chart helps focus on “vital few” elements for improvements.
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Pareto chart – Example (1/6)
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A restaurant conducted a survey with its customers
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The management wanted to understand the reasons for its falling sales. and customer satisfaction for improving productivity, time management •
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.
for improving productivity, time management and customer satisfaction
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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).
for improving productivity, time management and customer satisfaction
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Pareto chart – Example (4/6) Step 3 – Insert a Combo/Pareto chart
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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 for improving productivity, time management and customer satisfaction then on All Charts. •
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.
for improving productivity, time management and customer satisfaction
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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).
for improving productivity, time management and customer satisfaction Vital Few
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• This analysis shows, that 80% plus customer complaints can be resolved by focusing on just 2 issues (Vital Few). Price and Serving size.
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