What Is Pareto Analysis?
Pareto analysis is a statistical technique used to make business decisions based on the pareto principle. Pareto principle can be applied to any set of data to observe concentration of outcomes across influencing parameters. Pareto analysis is the tool that helps accomplish this study. A Pareto chart is a graphical tool that allows manufacturers to identify the most significant problems across the shop floor using quantifiable data.
In 1906, Vilfredo Pareto found that 80% of the land in Italy was owned by 20% of the population. This relationship was again found when the research was further supplemented with data of wealth distribution across all Europe.
40 years later, Joseph Juran applied this principle to business situations to study its validity. He observed that in quality control departments, most production defects arose from a small percentage of the causes. It was Joseph Juran who later named the 80/20 rule the ‘Pareto’s Principle of Unequal Distribution’
The first step is to define the objective of the analysis, or what is the problem you are trying to solve.
This step is the most important of all as it will influence the weightage of the causes later on in the analysis.
The next step is to identify the parameters that influence the objective. This can be achieved through cause analysis tools like 5 whys, fishbone analysis, or root cause analysis.
It is important to select only those parameters that have a clear and measurable impact on objectives.
For instance, if the objective is to reduce the cost of a finished product, then the influencing parameters could be development cost, prototyping cost and compliance cost. Further, material cost, labour cost and production cost can also be attributed.
Once the final list of parameters is obtained, the parameters need to be weighted based on the extent of impact on outcomes.
Based on our earlier example, material costs could contribute to the most of a product cost and hence shall get the highest weightage.
Once the parameters are weighted, sorting them by their order of measured impact will help us identify the significance of each parameter.
The most impactful parameters are the ones that collectively contribute to more than 80% of the impact on outcomes.
Based on the identification of high impact parameters and their order of importance, prioritize the responses.
Identify actions to address priorities, measure outcomes and execute the pareto analysis to demonstrate change or improvement.
Preparing a pareto chart is a structured sequence of actions that will automatically throw the result of the analysis on completion.