Have you heard of the 80/20 rule?
It’s a simple but powerful concept that says roughly 80% of your results come from 20% of your efforts.
Most businessmen use this idea, also known as the Pareto principle, to make big strategic decisions and grow their business.
They use Pareto chart analysis as a statistical tool for making decisions about the selection of specific tasks to produce significantly larger results.
In other words, organizations use the 80-20 rule to plan their resources so they get more bang for their buck.
Where does Pareto analysis get its name from? It is named after a 19th-century Italian economist Vilfredo Pareto observed that 20% of Italians held 80% of the country’s wealth. The story goes that he one day noticed that 80% of the peas came from 20% of the peas plants. This observation led to apply this idea to the distribution of wealth.
What Is Pareto analysis?
Today, Pareto analysis is a simple decision-making technique to understand problems with many possible courses of action and focus on solutions that will provide the most benefit.
How does it work? Quite simply, it is a visual representation of existing data to arrive at guidelines or action plans. The essence of Pareto chart analysis is essentially a plain bar graph.
Pareto analysis helps in understanding the prime contributing factors for desired outcomes and thus helps make a business decision based on this statistical analysis of the data.
A simple Pareto analysis example is that of a baking company which, through the Pareto chart analysis, finds that 80% of its sales and profits are through just 20% or one baked product: the fresh bread. This is the 80-20 rule.
Pareto Analysis Examples:
One can apply the rule of Pareto analysis i.e. the 80/20 rule to almost anything.
Here are some Pareto analysis examples: 80% of complaints of the customer arising from 20% of the company’s products and services
Or 20% of the products and services account for 80% of the company’s profit.
Let’s look at some more: 80% of delays in the work delivery result from 20% of the probable reasons for the delays or 20% of a system’s failures cause 80% of its problems.
How to do Pareto analysis?
Identify the problems
Wondering how to do Pareto analysis? Like all models for decision-making, Pareto analysis starts with the identification of the problematic areas. In a complex scenario like an MNC or a large-scale industry, it is hard to gauge the problems just by looking at the big picture.
List the problems down
Pareto analysis helps reduce your efforts. After identifying the problematic areas, the next step is to list the issues an individual or organization is facing. Jotting every detail down is essential as it helps in better classification of the data.
Identify the root cause for every issue
Once you've listed the issues, the next step is to identify the root cause of every problem. The customer did not like the food. Why? It was too spicy. This process helps identify other related issues and form a bigger picture of structural issues.
Collect the data
Pareto analysis then moves into data collection. Collect the data under the heads of the issues that need to be resolved.
Categorize the data
The Pareto analysis excel helps an individual to collect and categorize the data easily on MS Excel. Categorizing the data will help in the clubbing of the same problems and the same issues.
Score the problems
To use the Pareto chart analysis, one needs to score the data in their pertaining sets to see the most and least productive points. This will help in prioritizing the issues that need to be dealt with first.
Once the data analysis is done, one can move forward and start creating the best possible plan to tackle the issue. Small and focused changes will always work better and in a more effective manner.
Execute and evaluate
The Pareto analysis is incomplete without the systematic execution of the plan. Once the plan is set in motion, it is important to have quality checks and periodic Pareto chart analysis reviews to ensure one stays on course.
Harappa Education offers a course called Making Decisions that will help you understand the difference between big and small decisions in life. You can also use Pareto analysis along with concepts from the course to make the right decisions. And to make smart decisions.
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