The Pareto rule is quite a well known phenomenon. But are you using it effectively to help identify what’s holding your business’ growth back and which things could make it fly? In this guide well discuss how to use it to your advantage.
Overview of the Pareto Rule
If you don’t know of the pareto rule, it originated from an Italian economist in 1909. Vilfredo Pareto studied the distribution of wealth in Italy, and found that 20% of the population owned 80% of the land.
It turns out that this principle can be applied to most things. And whilst it may not be exactly 80/20, the vital few factors cause the majority of output, be it in business, sport and life.
Examples in the Real World
- If you look at your sales figures, you’ll see that around 20% customers will probably contribute to 80% sales
- 20% of your stock moves fast, whereas the others don’t
- 20% of your sales team achieve 80% of the total sales targets
- 20% root causes contribute to the majority of your process problems
- The vital few employees contribute to a large portion of productivity
- The vital few issues cause the majority of quality complaints from your customers
- Even the vital few employees are your trusted go-to people
The list is endless. Using the Pareto rule as a strategic tool, really can help your business thrive.
And if you use it in conjunction with a continuous improvement strategy, you’ll create a competitive advantage that’s hard to beat. Something that your entire workforce is adopting.
The key is to constantly look for the 20% causes to process failures and challenges. They’re out there. They just have to be seen.
Using Pareto Charts
We can highlight our findings from our pareto analysis, using a simple graph.
This chart plays an important role, as it allows us to see the 80/20 relationship of causes to the problem in question, quickly and without having to sort through data.
Here are a few examples:
This chart shows the total lost time in a business. Which problem would you tackle first?
First Part Inspection, of course… The data is hard to refute: around 3000 minutes have been lost – more than any other issue.
The Pareto below is from the same analysis as the above, but shows the number of incidents for each cause – Instead of lost time. Alongside this is the cumulative % line. This shows the problems in relation to the 80% rule.
First Part Inspection and Queries from Sales would be the issues to analyse, as they cause the majority of problem occurrences.
The chart below is a totally different style, but clearly shows the number of quality incidents within the Design department.
Here, positioning is the most occurring issue to investigate.
In the Business Context…
I’m sure you can see the impact of using the pareto rule to analyse issues that your business faces.
Here are some additional benefits of using the pareto rule:
- It helps teams focus on those causes that will have the greatest impact if solved
- You’ll find consistently that 20% of sources cause 80% of any problem
- It displays the relative importance of problems in a simple, quickly interpreted and visual format
- It helps prevent the common affect of shifting the problem – meaning the solution you’ve identified removes some causes but worsens others
- It’s a visible tool. You can track progress easily, which gives the team an incentive to push for more improvement
8 Steps to Using Pareto in Your Team
Here are the steps to start using the Pareto rule in your business.
1: Start by deciding which problem you want to focus on
Here are some examples:
- Why are we getting customer complaints? What problems are our customers having?
- Why is our machine efficiency so low? What is causing this and at what times in the day?
- What are our top selling products? What products don’t we sell anymore? How much stock are we holding that is not needed?
- Are our people happy at work? What’s troubling them the most?
- Why can’t we get a proposal turned around in 2 hours? What’s clogging the system up?
2: Choose the causes
Before we obtain data, we need to identify the causes that may affect our problem. These can either be brainstormed by the people operating the process or by using existing data and observations.
For example, let’s say we’re investigating customer complaints. The team brainstorm and identify the following:
- Incomplete orders delivered
- Delivered to the wrong address
- Damaged in transit
- Not delivered on time
- Poor quality product
- Poor customer service
Once we have this information, we can then track each customer complaint against our causes. Over time, we’ll be able to paint a picture as to the biggest contributors to customers’ ill feeling… all using the good old Pareto rule.
3: Choose the Most Meaningful Unit of Measure
There are normally two choices here:
- Measure the frequency of occurrence – measuring how many times each cause has occurred, or…
- The total cost of each cause – how much does each problem cost the business (in time or money, or anything else pertinent to you)
You may not know before this analysis starts, which measurement is the most appropriate. Be prepared to use both for the time being.
In our customer complaints example, the team decided to measure frequency, as it was the easiest information to obtain and the outcome for each would largely be the same.
4: Choose how long the study will last and gather the data
Choose a time period that will represent the problem. The greater the window of time, generally, the better the information.
Ensure to capture seasonality and across shifts, too.
When gathering the data, you can opt for two types:
- Historical (look through your current data) or
- Real time (track as you go)
Either way, the best way to capture this information is through simple check-sheets, like the one below. Capture these as you go, if you’re tracking real-time data.
5: Compare the Information
You’ll now have a lot of data. The important thing is to compare the frequency or cost of each problem. Which ones are the biggest contributors?
For our research, we’re extracting historical data over the last 12 months. Here are the results:
Step 6: Create your Pareto Chart
Pareto charts help disseminate the data you have, so everyone can see the biggest contributors quickly. You’ll want to create a pareto chart like the following:
- The largest causes are stacked from left in descending order across the horizontal axis
- You can add (optional) the cumulative percentage line, showing the 80/20 rule in action – which problems make up 80% cumulative affect
- It’s clear to see the biggest cause(s) to investigate further
8: Interpret the Results
The tallest bars in your chart normally represent the biggest cost or highest frequency of causes that contribute to the problem.
Dealing with these categories first, makes sense. These are prime candidates to set in motion your daily continuous improvement framework, to eliminate them.
This analysis can be used across the business and for any problem. Just ensure you don’t take on too many improvement projects at once. It will only result in burnout and nothing getting completed.
Baby steps work best, so prioritising the biggest problems makes sense.
Different Uses of the Pareto Chart
There are typically 4 ways the Pareto chart it can be used:
Breakdown Major Causes
This is where the tallest bar is then investigated further, and broken down itself into several causes – with its own Pareto analysis carried out.
Before and After Comparison
The new Pareto chart is compared to the old version, to show the results of your improvement efforts. This provides a side-by-side comparison.
This can be drawn as one chart or two separate ones.
Comparing the Source of Data
Here, data is collected on the same problem. However, it comes from different times, departments, shifts or equipment. This information is then compared side-by-side to show any variations.
Cost and Frequency Compared
This version uses the Pareto rule to show the frequency of causes to a problem, as well as the cost.
Sometimes, you’ll find the biggest frequency doesn’t always equate to the biggest cost, and so presenting both pareto charts in comparison to each other, can help show the impact – and help make the right decision as to what to go after.
The biggest occurrence to missed sales opportunities is through submitting proposals too late….
The biggest cost to the business is also missed proposals. Note that the next biggest opportunity in sales ($) is selling to customers who are not ready to buy – as apposed to the above chart showing customers thought the proposal was too expensive.