Pareto Analysis

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Pareto analysis

Pareto analysis is a formal technique


useful where many possible courses of
action are competing for attention. In
essence, the problem-solver estimates
the benefit delivered by each action,
then selects a number of the most
effective actions that deliver a total
benefit reasonably close to the
maximal possible one.

Pareto analysis is a creative way of


looking at causes of problems because
it helps stimulate thinking and organize
thoughts. However, it can be limited
A Pareto analysis in a diagram showing which cause should be
by its exclusion of possibly important
addressed first.
problems which may be small initially,
but will grow with time. It should be
combined with other analytical tools
such as failure mode and effects analysis and fault tree analysis for example.

This technique helps to identify the top portion of causes that need to be addressed to resolve the majority
of problems. Once the predominant causes are identified, then tools like the Ishikawa diagram or Fish-bone
Analysis can be used to identify the root causes of the problems. While it is common to refer to pareto as
"80/20" rule, under the assumption that, in all situations, 20% of causes determine 80% of problems, this
ratio is merely a convenient rule of thumb and is not, nor should it be considered, an immutable law of
nature.

The application of the Pareto analysis in risk management allows management to focus on those risks that
have the most impact on the project.[1]

Steps to identify the important causes using 80/20 rule


1. Form a frequency of occurrences as a percentage
2. Arrange the rows in decreasing order of importance of the causes (i.e., the most important
cause first)
3. Add a cumulative percentage column to the table, then plot the information
4. Plot (#1) a curve with causes on x- and cumulative percentage on y-axis
5. Plot (#2) a bar graph with causes on x- and percent frequency on y-axis
6. Draw a horizontal dotted line at 80% from the y-axis to intersect the curve. Then draw a
vertical dotted line from the point of intersection to the x-axis. The vertical dotted line
separates the important causes (on the left) and trivial causes (on the right)
7. Explicitly review the chart to ensure that causes for at least 80% of the problems are
captured
[2]

See also
Pareto distribution
Pareto chart
Pareto interpolation
Ishikawa diagram

References
1. David Litten, Project Risk and Risk Management (http://www.pmhut.com/project-risk-and-risk
-management), Retrieved May 16, 2010
2. "Pareto Analysis" (https://web.archive.org/web/20120208180732/http://erc.msh.org/quality/p
stools/pspareto.cfm). Archived from the original (http://erc.msh.org/quality/pstools/pspareto.cf
m) on 8 February 2012. Retrieved 12 January 2012.

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