PARETO

| Jul 2012| © 2012 UPES

Jul 2012 © 2012 UPES
History

Mr. Pareto was an Italian

scholar who conducted a
study on the distribution of
wealth among the various
social classes in Italy. He
was surprised that 80% of
the wealth of his country
was in the hands of 20% of
the population. His study
led to the famous 80-20 rule,
or vital few versus the trivial
many.

Jul 2012 © 2012 UPES

Learning Objectives

▪ Learn how to identify root causes using Pareto Analysis of collected

data

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Context: A Brief Recap of Our Problem-Solving Effort
to Date
▪ We’ve defined a specific problem (i.e., a process) and determined it is
important to solve. “Our team is on it!”
▪ We’ve outlined and described (“mapped”) the steps in that process, to
give everyone better understanding, and created a preliminary
Cause-and-Effect Diagram.
▪ We’ve brainstormed ideas on measurements we wished to gather, to
better understand the process, its inputs, and its outputs.
▪ We’ve diligently executed a detailed data collection plan.
▪ We now seek to analyze the collected data, first visually (through charts
and graphs) and then critically (through challenges, questions and
experience).

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So…Data, Data Everywhere! Now What!
▪ Scenario: You’ve spent precious weeks collecting specific data on your
process’s operational activities:
► Product Codes or Lot Numbers
► Dates of Production
► Batch or Lot Sizes
► Process Cycle Times
► Queue or Wait Times
► Scrap Rates; Scrapped and Reworked Units
► Scrap Codes
► Etc.

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So…Now What? (con’t)

▪ How do you know which specific inputs or factors will drive visible,
significant improvement?
► First, Stratify and Segment the Data!
► Show Graphical Displays of the Data
– Time-series Plots, Run Charts, Control Charts
– Histograms (and Scatter Plots, Dot Plots, Box Plots)

► Perform Statistical Summaries of the Data

– Mean, Median and Mode
– Min, Max, Range and Standard Deviation

▪ Let’s also learn about the 80/20 Rule!

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Pareto’s Law: The “80/20 Rule”
▪ In 1906, Italian economist Vilfredo Pareto created a mathematical
formula to describe the unequal distribution of wealth in his country.
Pareto observed that 20% of the people owned 80% of Italy’s wealth.
▪ In manufacturing, just a few contributors to a process control the vast
majority of that process’s results.
► 20 percent of the customers generate 80 percent of total sales.
► 80 percent of your stock comes from 20 percent of your suppliers.
► 20 percent of the defects cause 80 percent of the problems.
► 80 percent of your warehouse is taken up by 20 percent of stock.

▪ Pareto's Law can be a terrific tool to help you manage effectively,

“separating the vital few from the trivial many,” allowing you to focus on
what is truly important to control.

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Pareto Chart

▪ A Pareto chart is a graphical tool to detect and prioritize multiple quality

problems in a process.

Pareto Chart

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Pareto Chart (con’t)

▪ The Pareto principle (80/20 Rule) states that 80% of our problem can be
explained by just 20% of the causes.
► We just have to figure out which 20% are the critical
ones!
▪ The Pareto chart makes clear which “vital few” problems (causes)
should be addressed first:
► Manufacturing
– A quality engineer wants to know which defects occur most frequently.

► Transactional
– A human resources manager wants to know which day of the week the
majority of resumes are received.
– A salesperson wants to review last quarter’s sales figures by product
line.
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Pareto Chart (con’t)

▪ Pareto charts help you identify which of your problems are most
significant, so you can focus your improvement efforts on areas where
the largest gains can be made.
▪ Pareto charts are a special type of bar chart in which the horizontal axis
represents categories of interest (e.g., material types, sizes, scrap
codes, process centers), rather than a continuous scale (e.g., 0-100).
The categories are often “defects”, sources of defects, or inputs into a
process. The vertical axis represents some type of count or frequency
(e.g., occurrences, incidents, parts, time).
► By ordering the bars from left-to-right, largest to
smallest, a Pareto chart can help you visually
determine which of the defects comprise the
“vital few,” and which represent the “trivial
many.”
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Sample Chart – Freight Billing Errors

▪ The Pareto chart bars

are divided into causes
of freight billing errors.
▪ The vertical axis shows a
count of each error type.
▪ The red line is a
cumulative percentage.
▪ “Non-core carrier” is the
most frequent problem,
representing 42.9% of
the total errors.
▪ Next-largest contributor:
“Missing code”

We should consider focusing our improvement

efforts on ‘non-core carriers’ and ‘missing codes’.
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Sample Chart – Order Processing Delays

The ‘top 3’ processes will

get the most attention for
improvement efforts here.

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How to Create a Pareto Chart

▪ Collect data on different types or categories of problems.

► Use check sheets, daily scrap reports, production reports, etc.

▪ Tabulate the scores. Determine the total number of problems and/or

the total impact (time to fix, cost, etc.). Also, determine the counts or
impact for each category.
► If there are a lot of small or infrequent problems, consider adding
them together into an “other” category.
▪ Sort the problems by frequency or by level of impact.
▪ Draw bars for each category, starting with the largest and working
down.
► The “other” category goes last, even if it is not the smallest bar.

▪ Add in the cumulative percentage contribution line (sum of each

category’s contribution / totals).

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Interpreting a Pareto Chart

Clear Pareto Effect?

No Clear Pareto Effect?

Any ideas?

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Interpreting a Pareto Chart (con’t)

▪ Clear Pareto Effect: Just a few categories account for about 80% of the
count or impact.
► Great! Focus improvement efforts on those
specific categories.

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Interpreting a Pareto Chart (con’t)

▪ No Clear Pareto Effect: Though some bars are taller than others, it
takes a lot of categories to account for about 80% of the count or
impact. No cause (or category) you’ve identified is much more
important than any other.
► Re-do any Pareto charts using counts by focusing on
the impact of the categories (time/delay, quality/rework,
cost, etc.), to see if the change in focus creates a clear
Pareto effect.
► Revisit your cause-and-effect (fishbone) diagram or list
of potential causes, then:
– Ask which factors could be contributing to all potential causes;
– Think about other stratification factors you may not have
considered, and then re-do the Pareto analysis with them in
mind.
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Everyday Usage
▪ Where could you use Pareto analysis to identify priorities in your
area?

Any ideas?

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 Hartman Approach at AT & T
Pareto Priority Index
PPI= (S X P)/ (CXT)
S= Saving P=Probability of Success C=cost
T=Time of Completion (Years)
High PPI Suggest High Priority
Project Saving Probability Cost Time, PPI
Thousand Years

A 100 0.7 10 2 3.5

B 50 0.7 2 1 17.5

C 30 0.8 1.6 0.25 60.9

D 10 0.9 0.5 0.5 36

E 1.5 0.6 1.0 1.0 9

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Takeaways

▪ We often see the “80/20 Rule” in action – where the majority of the
impacts come from only a small fraction of the sources.
▪ A Pareto chart is a visual tool used to help identify which problems are
most significant, so that improvement efforts can be focused where they
will have the greatest impact.
▪ We can use the Pareto chart to manage effectively, by focusing on the
area of pain where we can have the greatest financial impact in the
least amount of time or with the fewest required resources.

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