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Pareto Analysis

ParetoThe Pareto Analysis is a technique that separates important causes from trivial causes. It is named after Vilfredo Pareto an Italian 19th century sociologist and economist who in 1897 argued that the distribution of income and wealth is uneven and follows a regular pattern that can be represented by a mathematical formula. In 1907 a similar theory was expressed diagrammatically by the American economist M. C. Lorenz. Both demonstrated that by far the largest share of a nation’s wealth is owned by a very small proportion of the people. But it was Juran (one of the original quality gurus who went to Japan in the 1950s) who realised that Lorenz’s diagram and Pareto’s formula — also known as the 80–20 rule — could be observed in other fields. For example:

It doesn’t have to be an exact 80–20 split for every set of circumstances you investigate. It could be 90–10, 70–30 or 60–40. The important things to remember is that where there is an uneven distribution of causes and effects we can separate the 'significant few' from the 'trivial many' and we can put our efforts into where they will have the biggest effect. The basic concept behind a Pareto analysis involves ranking data. Similar to a bar chart, a Pareto diagram shows a distribution, but it also necessitates ordering information from the largest to the smallest: the most significant to the most trivial.

Often the raw data is recorded on the left vertical axis with the percentage scale on the right vertical axis. Make sure that the two axes are drawn to the same scale so that the 100 per cent corresponds to the total on the left-hand scale.

Pareto diagrams can be used with or without a cumulative line. When cumulative lines are used, they represent the sum of the vertical bars, as if they were stacked on each other going from left to right. In this way you can answer questions such as: ‘Which causes, when taken together, make up 80 per cent of the problem?’ or ‘What percentage of the total is accounted for by the first three categories?’

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