Pareto Analysis: Principles, Applications, and Problem-Solving

Definition

Pareto analysis is a decision-making tool that helps to prioritize among multiple courses of action. The analysis is based on the Pareto principle, also known as the 80/20 rule, which states that roughly 80% of the effects come from 20% of the causes.

The problem solver estimates the benefits of Pareto analysis after each action and selects the most effective actions that deliver a benefit close to one. This approach is considered a creative way to identify and examine the causes of a problem, as it helps individuals to think and organize their thoughts.

Initially disregarding seemingly minor problems can lead to significant issues over time, thereby limiting the overall scope. To mitigate this, utilizing additional analytical tools such as fault-tree analysis or failure mode and effects analysis can yield improved outcomes.

Pareto principle

The Pareto analysis technique is a highly effective problem-solving tool. By identifying the primary causes of a problem, it becomes possible to use tools such as fishbone analysis or the Ishikawa diagram to determine the root cause of the issue, and develop effective measures to address it.

Commonly this rule is called as 80/20 principle, which follows is that in every situation 20% of causes are responsible for 80% of problems.

When should be used?

Pareto charts are versatile tools for optimization, applicable to any industry or business process workflow for documentation. The main purpose of the chart is to identify patterns that have a significant impact, making it a valuable tool for decision-making.

In general, two criteria are required to be fulfilled before using Pareto diagram

That should be two categories in which data can be arranged.

The rankings of the categories should be e off importance because if the ranking does not matter then and the frequency generated from this data will not be relevant.

How to solve problems?

Following are the steps to be followed to solve a problem:

#1. Identification of problem

The initial and crucial step in resolving any issue is to identify the problem. Whether there is a single problem or multiple issues at hand, it is essential to acknowledge and document them for effective resolution.

Sometimes when attempting to solve a problem, additional issues may arise. It is important to prioritize each problem and make necessary adjustments. Any new problems that arise should be documented and addressed accordingly.

#2. Identify the root cause:

The first step in addressing any problem is to identify and list down all the issues. Once this is done, the next step is to determine the causes of each problem. It's important to note that some issues may have superficial causes, while others may have more complex, fundamental ones.

To identify the root causes, various techniques can be used, including brainstorming, cause and effect analysis, or root cause analysis. These methods involve working with different team members to gain a deeper understanding of the problem and its underlying causes. Pareto analysis can also be used to prioritize which causes to address first.

#3. Prioritize problem:

Prioritizing problems is crucial in the problem-solving process, as multiple issues may arise. By scoring or ranking each problem, the one with the highest priority can be identified and addressed first. This approach enables problem solvers to efficiently tackle the most critical issues before moving on to the less pressing ones.

#4. Grouping together of similar problems:

It is common to encounter multiple issues surrounding the main problem, which can be grouped together based on a shared root cause. By breaking these problems down into smaller, more manageable groups, the problem solver can use a similar approach to tackle each one effectively. This is why the process of segregation is crucial in problem-solving.

This approach not only enables the problem solver to save time by reapplying the same solution to similar problems, but also allows for a more efficient and productive systems approach. Grouping similar problems together can significantly reduce time and effort for the problem solver.

#5. Take action for every problem:

Once the problem is identified, the root cause is addressed, and similar problems are grouped, then actions to be taken in order to solve the problem.

Components

To ensure a Pareto chart is effective, it is crucial to comprehend the components and their interconnectivity. The chart is visually displayed as a bar chart with two main variables: the x-axis and y-axis. The x-axis represents various categories, while the y-axis displays the number or frequency of occurrences for each category. The bars are arranged in descending order, with the highest frequency on the left and gradually decreasing towards the right.

The frequency of each part is ranked in descending order and a line graph is created to display the corresponding humidity percentage of all occurrences. This graph is utilized to determine if the dataset adheres to the Pareto principle, also known as the 80/20 rule.

Following are few of the components which can be found in the Pareto chart

X and y-axis – which represent data categories and a number of occurrences, respectively.

The bars are arranged in a descending order, indicating their alignment with the frequency of the event. Meanwhile, the percentage curve portrays the humidity percentage from left to right.

Examples of solving a problem with Pareto analysis

The company has taken to solve the problem of failing pharmacy. There are multiple problems that need to be solved.

Following is the list of identified problems and their causes along with the score assigned to them

Use Pareto to solve problems

#1. Customers are not attended quickly

Cause – very few to staff members

Score – 12

#2. One staff member takes a long time with one customer

Cause – identification of the prescription and deciphering it takes a long time

Score – 6

#3. It takes a lot of time to find a particular medicine

Cause – incorrect shelving of medicines.

Score – 5

#4. The pharmacy always seems out of order because of scattered customers.

Cause – lack of management of customers

Score – 1

#5. The staff is unable to understand the medicinal terms

Cause – lack of proper training

Score – 30

The score can be plotted on the graph can be represented by causes versus scores, and once the graph is presented to the pharmacy corrective action can be taken to prevent it.

Applications

Pareto analysis has practical applications in various day-to-day scenarios. One such example is in retail, where 80% of the store's sales are generated by only 20% of its customers. Conversely, the remaining 80% of customers contribute to only 20% of the total sales.

The savvy store owner recognizes the significance of the 20% of customers who generate 80% of revenue, and thus prioritizes their needs over the remaining 80% of customers. This principle extends to various industries, where a mere 20% of customers contribute to a whopping 80% of business volume.

The majority of clothing customers, approximately 80%, tend to prefer purchasing regular sizes. However, the remaining 20% of customers opt for non-regular sizes. Retailers take this into consideration and often stock a larger quantity of regular-sized clothing as they make up the majority of sales.

In the case of alphabets, 20% of alphabets sound 80% of words, and these 20% alphabets are vowels.

Pareto analysis and quality control

The Pareto chart analysis finds significant application in the field of Total Quality Control (QTC). It serves as a crucial tool within the six sigma framework and functions as a mathematical model to monitor the company's performance.

Utilizing statistical tools and charts is a crucial skill in project management, as it allows for the analysis of data. This falls under the DMAIC framework of define, measure, analyze, improve, and control, which is essential for measuring and improving project outcomes. Additionally, it's important for managers to apply the Pareto principle when selecting projects to ensure that resources are focused on those that will yield the greatest results.