With constant growth in customers expectation in term of quality, cost and delivery, you can’t focus on all areas of a project. You have to choose what is critical and what is trivial.

In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth.

Pareto’s Law

Further empirical studies for other time periods, for other countries, produced the stunning result that they all followed the same pattern. Later analysis of distributions in industry and nature has demonstrated that 80/20 Pareto distributions were very common in various fields and not exclusive to income distribution.

Application

Because Pareto’s initial discovery involved a distribution of 80% of wealth to 20% of families and it’s inverse, the Pareto Principle is often called “The 80/20 rule”. The 80/20 Rule means that in nearly all cases, a few (20 percent) are vital and many (80 percent) are trivial.

Other ways this law could be rephrased :

• 80 percent of results come from 20 percent of efforts
• 80% of activity will require 20% of resources
• 80% of the difficulty in achieving something lies in 20% of the challenge
• 80% of revenue comes from 20% of customers
• 80% of problems come from 20% of causes
• 80% of profit comes from 20% of the product range
• 80% of complaints come from 20% of customers

While misnamed, and however paraphrased, the Pareto Principle, Pareto’s Law, the 80/20 rule, or the 80/20 principle, is a simple and effective management tool with wide business application. Applying this phenomenon when analyzing raw data by creating a Pareto Chart, or Pareto Diagram, generates valuable information that can easily guide management decisions. Ultimately, this allows us to focus on the vital few, rather than the trivial many, and focus effort where it will have the most impact or value.

How-to

1. Decide what categories you will use to group items.
2. Decide what measurement is appropriate. Common measurements are frequency, quantity, cost and time.
3. Decide what period of time the Pareto chart will cover: One work cycle? One full day? A week?
4. Collect the data, recording the category each time. (Or assemble data that already exist.)
5. Subtotal the measurements for each category.
6. Determine the appropriate scale for the measurements you have collected. The maximum value will be the largest subtotal from step 5. (If you will do optional steps 8 and 9 below, the maximum value will be the sum of all subtotals from step 5.) Mark the scale on the left side of the chart.
7. Construct and label bars for each category. Place the tallest at the far left, then the next tallest to its right and so on. If there are many categories with small measurements, they can be grouped as “other.”

Steps 8 and 9 are optional but are useful for analysis and communication.

8. Calculate the percentage for each category: the subtotal for that category divided by the total for all categories. Draw a right vertical axis and label it with percentages. Be sure the two scales match: For example, the left measurement that corresponds to one-half should be exactly opposite 50% on the right scale.
9. Calculate and draw cumulative sums: Add the subtotals for the first and second categories, and place a dot above the second bar indicating that sum. To that sum add the subtotal for the third category, and place a dot above the third bar for that new sum. Continue the process for all the bars. Connect the dots, starting at the top of the first bar. The last dot should reach 100 percent on the right scale.

Example

Imagine that you followed the previous step and get the following tables of datas :

Now you can draw the following Pareto’s chart.

According to this chart, if you handle D, 68% of the problems will be treated. By also doing B, you’ll solve 83% of the problems.

On your side, are you using Pareto’s Principle to find out what features are critical ? If not, what else are you using ? Feel free to share your thought in the comments section.

– Geoffrey

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