Pareto analysis is a statistical technique in decision making that is used for selection of a limited number of tasks that produce significant overall effect. It uses the Pareto principle - the idea that by doing 20% of work you can generate 80% of the advantage of doing the entire job. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%).
Pareto analysis is a formal technique useful where many possible courses of action are competing for your attention. In essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most effective actions that deliver a total benefit reasonably close to the maximal possible one.
Steps to identify the important causes using Pareto analysis
- Step 1: Form a table listing the causes and their frequency as a percentage.
- Step 2: Arrange the rows in the decreasing order of importance of the causes (i.e., the most important cause first)
- Step 3: Add a cumulative percentage column to the table
- Step 4: Plot with causes on x- and cumulative percentage on y-axis
- Step 5: Join the above points to form a curve
- Step 6: Plot (on the same graph) a bar graph with causes on x- and percent frequency on y-axis
- Step 7: Draw line at 80% on y-axis parallel to x-axis. Then drop the line at the point of intersection with the curve on x-axis. This point on the x-axis separates the important causes (on the left) and trivial causes (on the right).