Pareto Chart
Pareto chart (also referred Pareto diagram) is a problem solving tool which is based on the assumption that a majority of problems is caused by a handful of root causes. This assumption was developed by an Italian economist Vilfredo Pareto and is known as the “Pareto principle”. Pareto chart is widely used in management, economics and quality management.
Pareto Principle
In order to effectively use the Pareto chart one needs to understand the underlying Pareto principle or the rule of 80/20. According to this rule 80% of outcomes (problems) are caused by 20% of factors (causes). Although being simple, this is a very powerful concept for any organization. It implies that by focusing on a small number of factors, we can achieve greatest gains or improvements. This further means that an effort targeted on the most critical causes can have the highest return. For example, if A,B,C,D,E factors (causes) are responsible for X,Y,Z outcomes (problems), there is no need to spend time and money correcting all of the factors to eliminate X,Y,Z problems. Instead the most effective approach is to identify the gravest and most pervasive problems from X,Y and Z and target the factors which have the greatest effect on the mentioned outcomes. Say Y and Z are the most important challenges to your organizational success and are largely caused by the factors C and E. It would be reasonable to focus on C and E and achieving the greatest gains (picking a low hanging fruit) rather than trying to resolve everything and inefficiently spend time and resources for a marginal improvement. But how to determine which factors (causes) have the greatest effect? That’s where the Pareto chart comes into picture.
Pareto Chart
Pareto chart is basically a bar chart. It prioritizes causes (or groups of causes) which lead to outcomes (problems). Most often these outcomes are undesirable and are targets for elimination or correction. Below is an example of a Pareto chart where causes of IT helpdesk unsatisfactory customer service performance are plotted. It is clear from the diagram that 79% of underperformance is caused by two factors: lack of training and inadequate pay. The former seems to account for 55% of underperformance and the latter for 24%. The other three factors account only for 21% of problems. Given the Pareto principle of 80/20, the most prudent course of action would be providing meaningful training to staff and revising a pay structure. Attacking these two factors will provide greatest gains.
How to build a Pareto Chart and use Pareto analysis
Now that you understand how the Pareto diagram and the benefits of Pareto analysis, here is the outline of how to build a Pareto chart, conduct the analysis and evaluate the outcome in 7 steps:
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Identify a problem
You need to identify a problem before solving it. It is very important to define a problem accurately as cause identification is contingent upon problem definition. An organization may be facing multiple challenges (problems), but it often makes sense to isolate the problems and attack them separately. Starting with the gravest problems is a sound approach. Again, the Pareto chart can be used to rank order the problems in terms of significance. List all contributing factors Once a problem is identified, the next step is to determine the root causes which contribute to the problem. In our IT helpdesk example, unsatisfactory customer service is caused by lack or training, inadequate pay, flawed communication, high turnover and lack of managerial feedback. Identifying causes needs to be based on information gathering within an organization. This may be achieved by conducting staff interviews, talking to customers and collecting any other available data. Assign percentage weight to each cause This is a crucial and at the same time a rather challenging step which will help determine the causes whose targeting will yield the greatest improvement. In our IT helpdesk example, the interviews conducted among the helpdesk employees revealed that 55% instances of unsatisfactory customer service were due to lack of training. 24% seemed to be a result of lack of adequate pay. Flawed communication, high turnover and lack of managerial feedback correspondingly contributed to 12%, 5% and 4% of unsatisfactory customer service instances. Plot and rank the causes Once percentage weights are assigned it is time to plot them on the Pareto chart and rank order them form high scoring to low. Normally, the first two or three bars will account for the bulk of the problem. In our example lack of training and inadequate pay account for 79% of the unsatisfactory customer service instances. These causes need to be targeted to achieve greatest gains in improving customer service quality. |
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Take action
Now that the major contributing causes are identified it is time to act. An effective manager could plan new training activities. Possibly contract an outside training agency to deliver quality training. The manager could also work with the HR department to revise the salary and bonus structure and potentially tie bonuses to customer evaluations of their customer service experiences with the helpdesk.
Evaluate the outcome
Finally, after conducting Pareto analysis with Pareto diagrams and taking corrective actions, it is time to evaluate if the actions bore any fruits. If the analysis is properly done and the adequate actions are this step will reveal the improvement.
Now that the major contributing causes are identified it is time to act. An effective manager could plan new training activities. Possibly contract an outside training agency to deliver quality training. The manager could also work with the HR department to revise the salary and bonus structure and potentially tie bonuses to customer evaluations of their customer service experiences with the helpdesk.
Evaluate the outcome
Finally, after conducting Pareto analysis with Pareto diagrams and taking corrective actions, it is time to evaluate if the actions bore any fruits. If the analysis is properly done and the adequate actions are this step will reveal the improvement.
