Industry 4.0 Glossary

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.

The pareto principle, commonly known as the 80/20 rule is drawn from the premise that 20% of the cause can deliver 80% of the effect. It finds application in diverse fields like value analysis, macro-economic analysis, and manufacturing optimization.

A Brief History Of Pareto Analysis

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’

Steps In A Pareto Analysis

The Pareto principle can be used to sort problems based on severity. They can be grouped into different categories based on the causes of the defect. For instance, a disproportionate share of customer complaints could be caused by a very small set of field failure issues. Each of these categories are then weighted with a score based on the impact caused due to it. Let us breakdown the process into a few steps:

Step 1: Define Objective

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.

Step 2: Identify Influencing Parameters Or Causes

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.

Step 3: Assign Weight to Parameters

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.

Step 4: Evaluate Highest Impact

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.

Step 5: Prioritize Response And Actions

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.

How To Prepare A Pareto chart?

Preparing a pareto chart is a structured sequence of actions that will automatically throw the result of the analysis on completion.

Prepare the data required for analysis. This means that all measurable causes need to have standardized measures of impact. The data needs to be sorted on the significance of impact.
Once the data is prepared, plot the impact of different causes on the outcome in the form of a column chart as the primary vertical axis.
Plot the significance of outcomes on the same graph in the form of a line chart as a secondary vertical axis.
Identify the causes that contribute to at least 80% of outcomes – vital Few vs trivial many
Select causes and prioritize based on their order of impact

Pareto Analysis For Manufacturing Efficiency

In short, as a root cause analysis tool pareto analysis can help and improve organizational efficiency in manufacturing processes. It can help identify problems and prioritize them based on severity for remedial measures. It can also significantly improve decision making and aid in arrival at group consensus in issues that require multi-dimensional approvals.