Pareto Analysis

Using the 80:20 Rule to Prioritize

Avoid the "law of diminishing returns". iStockphoto/tom_fewster

Imagine that you've just stepped into a new role as head of department. Unsurprisingly, you've inherited a whole host of problems that need your attention. Ideally, you want to focus your attention on fixing the most important problems. But how do you decide which problems you need to deal with first? And are some problems caused by the same underlying issue? Pareto Analysis is a simple technique for prioritizing possible changes by identifying the problems that will be resolved by making these changes. By using this approach, you can prioritize the individual changes that will most improve the situation. Pareto Analysis uses the Pareto Principle also known as the "80/20 Rule" which is the idea that 20% of causes generate 80% of results. With this tool, we're trying to find the 20% of work that will generate 80% of the results that doing all of the work would deliver.

Note: The figures 80 and 20 are illustrative the Pareto Principle illustrates the lack of symmetry that often appears between work put in and results achieved. For example, 13% of work could generate 87% of returns. Or 70% of problems could be resolved by dealing with 30% of the causes.

How to Use the Tool

Step 1: Identify and List Problems

Firstly, write a list of all of the problems that you need to resolve. Where possible, talk to clients and team members to get their input, and draw on surveys, helpdesk logs and suchlike, where these are available.

Step 2: Identify the Root Cause of Each Problem

For each problem, identify its fundamental cause. (Techniques such asBrainstorming, the 5 Whys, Cause and Effect Analysis, and Root Cause Analysiswill help with this.)

Step 3: Score Problems

Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying to solve.

For example, if you're trying to improve profits, you might score problems on the basis of how much they are costing you. Alternatively, if you're trying to improve customer satisfaction, you might score them on the basis of the number of complaints eliminated by solving the problem.

Step 4: Group Problems Together By Root Cause

Next, group problems together by cause. For example, if three of your problems are caused by lack of staff, put these in the same group.

Step 5: Add up the Scores for Each Group

You can now add up the scores for each cause group. The group with the top score is your highest priority, and the group with the lowest score is your lowest priority.

Step 6: Take Action

Now you need to deal with the causes of your problems, dealing with your top-priority problem, or group of problems, first. Keep in mind that low scoring problems may not even be worth bothering with - solving these problems may cost you more than the solutions are worth.

Pareto Analysis Example

Jack has taken over a failing service center, with a host of problems that need resolving. His objective is to increase overall customer satisfaction. He decides to score each problem by the number of complaints that the center has received for each one. (In the table below, the second column shows the problems he has listed in step 1 above, the third column shows the underlying causes identified in step 2, and the fourth column shows the number of complaints about each column identified in step 3.)

# 1 2

Problem (Step 1) Phones aren't answered quickly enough.

Cause (Step 2) Too few service center staff.

Score (Step 3) 15 6

Staff seem distracted and Too few service center under pressure. staff. Engineers don't appear to be well organized. They Poor organization and need second visits to preparation. bring extra parts. Engineers don't know what time they'll arrive. This means that customers may have to be in all day for an engineer to visit. Service center staff don't always seem to know what they're doing.

Poor organization and preparation.

Lack of training.

30

When engineers visit, the customer finds that the Lack of training. problem could have been solved over the phone.

21

Jack then groups problems together (steps 4 and 5). He scores each group by the number of complaints, and orders the list as follows: 1. Lack of training (items 5 and 6) 51 complaints. 2. Too few service center staff (items 1 and 42) 21 complaints. 3. Poor organization and preparation (items 3 and 4) 6 complaints.

As you can see from figure 1 above, Jack will get the biggest benefits by providing staff with more training. Once this is done, it may be worth looking at increasing the number of staff in the call center. It's possible, however, that this won't be necessary: the number of complaints may decline, and training should help people to be more productive. By carrying out a Pareto Analysis, Jack is able to focus on training as an issue, rather than spreading his effort over training, taking on new staff members, and possibly installing a new computer system to help engineers be more prepared.

Key Points:

Pareto Analysis is a simple technique for prioritizing problem-solving work so that the first piece of work you do resolved the greatest number of problems. It's based on the Pareto Principle (also known as the 80/20 Rule) the idea that 80% of problems may be caused by as few as 20% of causes. To use Pareto Analysis, identify and list problems and their causes. Then score each problem and group them together by their cause. Then add up the score for each group. Finally, work on finding a solution to the cause of the problems in group with the highest score. Pareto Analysis not only shows you the most important problem to solve, it also gives you a score showing how severe the problem is.

Setting priorities for action

When faced with a range of issues, it is often difficult to know which to work on first. To resolve this dilemna, the most useful thing to do is to apply Pareto's rule. This rule says - "eighty percent of your troubles will come from 20 per cent of your problems". In other words, problems will rarely have equal impact, so it is best to first concentrate on the most important. The value of this rule is not that it provides a scientifically accurate estimation of the weightings which attach to a range of alternatives (which it does not), but simply that it is a reminder to always look for 'the vital few' issues, and to separate them from 'the trivial many', before attempting to solve problems. The next step is to identify which particular problems are the most important. This is done by collecting appropriate data and displaying it in the form of a histogram with each measured characteristic shown in descending order of magnitude. Such a histogram is known as a Pareto chart. An example is shown below.

The high value items to the left hand side of the chart are the ones you need to concentrate on first. Pareto's rule is also known as the 80/20 rule. It was named after Vilfredo Pareto who, in the late 18th century, studied the distribution of wealth in Europe and found that 80% was held by 20% of the population. A number of well publicised business studies during this century showed similar 80%/20% relationships, and claimed for example that, "managers spend only 20% of their time to complete 80% of their work", and "80% of a company's business comes from 20% of its customers". These studies served to confirm the rule as an accepted part of management folklore.

Use the Rule whenever you need to make a choice

Apply Pareto's rule, and complete a Pareto chart, whenever a choice has to be made between a number of alternative directions for action. This may be after an analytical exercise has been completed to uncover the possible sources of a particular problem, or after a brainstorming session to generate creative ideas to address an issue.

How to use the rule

After an analysis or ideas generating session, you will have a laundry list of items to evaluate. If the list is a long one (say more than five or six items), try to get it down to a manageable size by putting to one side any factors you reasonably suspect are of lesser significance. Don't discard them entirely because without proper measurement you will never know for certain how significant the factors are. Better just to put them to one side and return to them later if the selected alternatives don't prove successful. For the remaining factors, decide on the best way to measure their relative significance and collect the data required. Plot the data on a histogram in descending order of importance.

Completing the histogram is particularly important if you are working with a team, or need to communicate the results of the data collection in a report or presentation. If you are working with a team, the histogram becomes the focal point for discussing the validity of the findings and how to pursue the issues involved. Listed step-by-step below is an example of the development of a Pareto chart. In this case, an analysis session was completed on the reasons why customers experienced undue delays in delivery of their goods from the time a picking slip is generated in the warehouse. This session yielded a laundry list of possible causes. picking errors missing stock sent to wrong address part-supply refused refused at delivery address/no receiving authority goods returned/exceeded use-by date goods returned/damaged goods returned/servicing or preparation not done goods mislaid by carrier delivery delayed by carrier goods returned/damaged in transit

To reduce the list to a manageable number of items, some less likely causes were put aside and others were aggregated to produce the following final list. goods returned/incorrect items goods returned/defective goods returned/wrong address goods not found in warehouse

A data collection program was then undertaken to find out how much time was being taken to correct these problems for the customer, and the results plotted in the histogram shown below.

The Pareto chart shows that the priority problem, the one causing greatest delays to customers, is incorrect goods being sent.Reducing the incidence of this problem will yield the greatest benefit to customers. After improvements have been made, another analysis can be made to determine if the problem has been reduced and confirm that "goods not found in the warehouse" is the next most important problem to address.