The Pareto chart can be very helpful for making decisions in a company because it lets you figure out the important steps you need to take to get the desired results.
If you still don’t know what this technique is and how to use it, this article will tell you everything you should take into account.
What is the Pareto Chart?
A Pareto chart is a technique that allows you to graphically classify information from most to least relevant, aiming to recognize the most important problems that you should focus on and solve.
This method is based on the Pareto principle, often known as the 80/20 rule, which develops a correspondence relationship between the 80-20 groupings, where 80% of the effects result from 20% of the causes.
The Pareto diagram, also known as the ABC distribution curve, consists of a graph that classifies the aspects related to a problem and orders them from highest to lowest frequency, thus allowing clear visualization of the leading cause of a consequence.
Many businesses don’t understand that increasing profits is not always by increasing product variety. Sometimes, we ourselves can be the worst enemy of our products, taking away sales to offer others.
So, the function of the Pareto chart is that companies can recognize which are the most important needs to which they should direct their efforts and not waste resources on irrelevant issues, hence the importance of always conducting data analysis.
Characteristics
The Pareto Chart is a technique of simple calculations. It helps identify the most significant causes or problems that account for most of the issues, allowing for more targeted problem-solving efforts. The following are the most important characteristics of the Pareto chart:
- Vertical Bar Chart
It represents different categories or factors. Each bar’s height represents the frequency, magnitude, or relevance of the category being represented.
- Descending Order
The bars are organized in descending order from left to right, with the most important category on the left. This allows you to quickly discover the most significant factors contributing to an issue or circumstance.
- Cumulative Percentage Line
A line graph is superimposed on the bar chart to illustrate the cumulative percentage of each category’s overall contribution. It begins on the left side and rises to the right, often as a curving line.
- Axis Labels
The vertical axis on the left represents the frequency or magnitude of each category, while the horizontal axis at the bottom represents the categories themselves.
- Category Labels
Each bar on the chart is labeled to indicate the associated category. These labels help in understanding the particular aspects under consideration.
- Focus on Vital Few
Pareto charts emphasize the “80/20” concept, which suggests a large amount of the influence or issues may be tracked to a small number of factors. It helps in prioritizing resources and attention to the most important areas for improvement.
- Analysis and Decision-Making
The chart makes it easier to make decisions based on facts by demonstrating visually how important different factors are. It lets you figure out the main causes and work on resolving those to get the desired results.
Advantages of the Pareto Chart
The Pareto chart allows you to define priorities and focus on knowing the root causes to solve problems effectively. By using this tool, you can make objective decisions that bring more benefits to your organization.
Among the advantages of using the Pareto Diagram for decision-making are:
- Identification of the main problems: The Pareto diagram lets us quickly identify the main problems affecting a process, product, or service. In this way, improvement efforts can be focused on the most critical areas and obtain significant results quickly.
- Prioritization of improvement efforts: The Pareto chart assists in prioritizing improvement efforts by highlighting the primary problems. Resources can be directed toward issues that influence process performance or customer satisfaction.
- Visualization of relative importance: The Pareto chart provides a visual representation of the relative importance of each case. This helps to better understand the problem’s nature and impact on overall performance.
- Effective Communication: The Pareto chart is an effective communication tool that can help engage stakeholders and foster collaboration in continuous improvement.
- Saving time and resources: The Pareto chart can help save time and resources by prioritizing improvement efforts and focusing resources on the most important areas.
What is a Pareto Diagram used for?
The Pareto chart can be used to:
- Analyze the different products and services you offer and improve their quality.
- Observe the production of products in time and volume.
- Identify which products generate the highest sales and which have been stored for the longest.
- Recognize opportunities to improve your business.
- Identify the reasons why some problems occur and prioritize solutions.
Uses of the Pareto Chart in an Organization
The Pareto chart can be applied in all areas of a company. Next, we will show you some of them:
- Inventory control: The ABC inventory control system is based on the Pareto principle, considering that 20% of the items in the warehouse generate 80% of the inventory movements, so they are the ones that need to be paid the most attention.
- Sales: 80% of closed sales come from 20% of the products, and 20% of the most loyal customers are the ones that generate 80% of the total profits, from which more business and marketing strategies can be developed effectively.
- Customer service: It is considered that 20% of product failures represent 80% of customer complaints, so it helps to prioritize precise optimization to reduce incidents.
- Production control: Using the Pareto diagram helps to study the 20% of the defects in a production that produce 80% of the negative consequences of the procedures, which helps to prioritize the improvement program.
- Human Resources: In the area of organizational development, the 80/20 rule can be applied to identify problems such as absenteeism since 80% of absences are mainly due to 20% of collaborators.
How to Create a Pareto Chart?
To create a Pareto chart, do the following steps:
- Define the Problem: Clearly identify and prioritize the problem or issue you want to research. Determine the categories or factors that are involved in the situation.
- Collect Data: Gather relevant data for each category or element. This could be in the form of counts, frequencies, or magnitudes. Ensure that the data is correct and complete.
- Order the Data: Arrange the categories or elements in descending order based on their contribution to the problem.
- Calculate Cumulative Percentages: Divide the cumulative sum of the category values by the total sum of all categories to calculate the cumulative percentage for each category. This reflects how much each area contributes to the overall problem.
- Create the Chart: Create a vertical bar chart with the categories on the horizontal axis and the frequencies or magnitudes on the vertical axis using spreadsheet software or a data visualization tool. Make sure the bars are labeled and scaled correctly.
- Add Cumulative Percentage Line: Draw a line graph on top of the chart to demonstrate the cumulative percentage. The line begins on the left side of the chart and gradually increases to the right, representing the total contribution of each group.
- Label the Axes: Provide clear labels for the vertical and horizontal axes, specifying the units of measurement and the categories represented.
- Title and Subtitles: Add a title to the chart indicating the investigated objective or problem. Subtitles can optionally be included to provide extra context or information.
- Interpret and Analyze: Analyze the Pareto chart to determine the “vital few” factors that contribute the most to the problem. Concentrate on addressing these variables to have the most significant influence on changing the situation.
Tips for making a Pareto Chart
Drawing up a Pareto chart and selecting priority issues is not always easy. Here are some tips that you can take into account:
- Evaluate the validity of the information collected: Before doing it, consider that the information collected in a short time can give wrong results. If you don’t control the data, it can change from moment to moment and not represent the level of priority that has been set.
- Sort the categories methodically: If we do not look at the diagram correctly, the results will not be useful. Choose your criteria carefully and prioritize the most important ones.
- Focus on frequent problems: This will reduce the number of points needing repair. It does not mean that you forget the minor problems, but fixing the biggest ones will help you increase your financial resources.
Pareto Chart Example
The following example consists of a company that is dedicated to the sale of different brands of flour. Below we present the sales for each one:
| Sales by The Brand of Flour | |
| Brand | Sales in Thousands |
| Blue Sphere | $72,858.00 |
| Golden Moon | $17,131.00 |
| The Girl | $8,370.00 |
| Hercules | $34,716.00 |
| The King | $22,085.00 |
| Grandma Josefa | $980.00 |
| The Yaqui | $4,511.00 |
| Total | $160,651.00 |
The entire amount sold is $160,651,000.00. As a result, the percentage for each is as follows:
| Sales by The Brand of Flour | ||
| Brand | Sales in Thousands | Percentage |
| Blue Sphere | $72,858.00 | 45.40% |
| Golden Moon | $17,131.00 | 10.70% |
| The Girl | $8,370.00 | 5.20% |
| Hercules | $34,716.00 | 21.60% |
| The King | $22,085.00 | 13.70% |
| Grandma Josefa | $980.00 | 0.60% |
| The Yaqui | $4,511.00 | 2.80% |
The next step is to order from highest to lowest and add the cumulative frequency percentage.
| Sales by The Brand of Flour | |||
| Brand | Sales in Thousands | Percentage | Cumulative Frequency Percentage |
| Blue Sphere | $72,858.00 | 45.40% | 45.40% |
| Hercules | $34,716.00 | 21.60% | 67.00% |
| The King | $22,085.00 | 13.70% | 80.70% |
| Golden Moon | $17,131.00 | 10.70% | 91.40% |
| The Girl | $8,370.00 | 5.20% | 96.60% |
| The Yaqui | $4,511.00 | 2.80% | 99.40% |
| Grandma Josefa | $980.00 | 0.60% | 100.00% |
Finally, the next process is to record the frequency on a bar graph and the cumulative frequency with a line graph. On the left side of the graph, we will see the percentage of the first graph, and on the right side, that of the second.
With this result, it can be concluded that the best decision is to remain with the Blue Sphere, Hercules, and The King brands since they represent just over 80% of sales, while the others represent less than 20% of total sales.
Conclusion
The Pareto Chart can be particularly beneficial for decision-making and the development of successful strategies that assist a business in reaching its key objectives.
To get accurate and useful results, it is important to make sure that the data collected is correct, complete, and relevant and that the proper techniques are used to analyze it. In short, the Pareto Chart is a helpful tool that can make data collection and research much better and more efficient.
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