Pareto Analysis is a statistical method that’s used for decision making by using the Pareto Principle, or the “law of the vital few,” which indicates that 80% of problems occur as a result of 20% of causes. By applying this 80/20 principle to business, organizations can make significant quality improvements or discover underlying problems that demand attention and resolution. This technique also helps management to focus on and identify targeted areas for adjustments and helps to guide corrective actions and solve highly specific problems across the organization.
This principle and corresponding technique enable companies to measure, evaluate, and uncover key findings using proven statistical analytics to specific business scenarios, such as Human Resources or Manufacturing.
Pareto Chart Analysis and its Applications
Pareto Analysis is extremely versatile and can be used across a spectrum of circumstances, including pinpointing business issues, prioritizing workloads, drastically improving organization, enhancing employee productivity, and ultimately to create opportunities for increased profitability.
This principle indicates that the connection or relationship between input and output is not necessarily balanced.
Simply put, you can adjust your decision making by having better insight as to how to strategically prioritize changes so that you can focus on the solutions that will provide the most substantial impact.
How Businesses Use Pareto Analysis
Pareto Analysis is used in various business scenarios so that you can identify problems, the exact causes for each problem, prioritize the problems, group and score problems, and eventually act upon the findings.
The following demonstrates some business examples of Pareto Analysis in action.
To better analyze profitability, an organization could use this technique to discover that 80% of profits are a direct result of 20% of their products and services.
In productivity analysis, companies can apply this principle to measure their workforce and make tailored adjustments to improve productivity and efficiency based on findings that 20% of employees produce 80% of the revenue.
For an employee who utilizes feedback to modify their approach to time management, this principle could uncover that 80% of work output is only the result of 20% of actual time spent at work.
Organizations in investment or financial services can utilize Pareto Analysis to better manage clients, assuming if the firm has 100 clients, 80% of the revenue should be contributed by 20% of the best clients with the most assets.
The Pareto Chart Analysis and Interpretation Process
Businesses can use the Pareto Chart Analysis to identify how to achieve business goals and get results using data that helps to target specific areas for improvement that will have the most significant impact.
Below are the specific steps to using a Pareto Chart to assist with locating the most important causes.
- Make a vertical bar chart, then arrange the causes in the x-axis and place the number of occurrences on the y-chart.
- The bar chart should be in descending order of significance.
- Then add up the cumulative cause counts for each in descending order.
- Measure the progressing count percentage for each individual cause in descending sequence.
- Make another y-axis with the percentages arranged in descending sequences of 10, from 100% all the way to 0%.
- Map out the cumulative count percentages for each individual clause across the x-axis.
- Then start to connect each point across the axis until they form a curve.
- Draw out a line at the 80% mark on the y-axis, then lower the line at the intersection points with the curve falling on the x-axis. This spot on the x-axis isolates the important causes on the left side from the less significant causes on the right.
Benefits of Pareto Analysis
This concept has widespread business and economic implications across financial performance, process improvement, client retention, and many more. But the real benefits lie in its power to help businesses identify their top assets and utilize them in the most efficient manner possible to generate more value.
Enhance Decision Making
Businesses can target the causes for immediate changes and prepare team members and departments to react to those changes to the best of their capabilities.
Gives management a better opportunity to prioritize tasks and solve problems efficiently by focusing on work where it is most needed.
Better Problem Solving
Improves decision making and problem-solving by locating the root causes of problems and understanding how to take better action.
Individual and collective talent can be distributed where it aligns best with business goals based on productivity and time management.
Understand best performing products and purposefully focus marketing strategies towards specific audiences.
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