Pareto Analysis is a simple technique for prioritizing possible changes by identifying the problems that will be resolved by making these changes. By using this approach, you can prioritize the individual changes that will most improve the situation.
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, 80% of the advantage of doing the entire job can be generated. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%). http://en.wikipedia.org/wiki/Pareto_analysis
The Pareto effect is named after Vilfredo Pareto, an economist and sociologist who lived from 1848 to 1923. Originally trained as an engineer he was a one time managing director of a group of coalmines. Later he took the chair of economics at Lausanne University, ultimately becoming a recluse. Mussolini made him a senator in 1922 but by his death in 1923 he was already at odds with the regime. Pareto was an elitist believing that the concept of the vital few and the trivial many extended to human beings
Pareto Analysis uses the Pareto Principle – also known as the "80/20 Rule" – which is the idea that 20% of causes generate 80% of results. With this tool, we're trying to find the 20% of work that will generate 80% of the results that doing all of the work would deliver
Note:
The figures 80 and 20 are illustrative – the Pareto Principle illustrates the lack of symmetry that often appears between work put in and results achieved. For example, 13% of work could generate 87% of returns. Or 70% of problems could be resolved by dealing with 30% of the causes
How to Use the Tool
Step 1: Identify and List Problems
Firstly, write a list of all of the problems that you need to resolve. Where possible, talk to clients and team members to get their input, and draw on surveys, helpdesk logs and suchlike, where these are available.
Step 2: Identify the Root Cause of Each Problem
For each problem, identify its fundamental cause. (Techniques such as Brainstorming, the 5 Whys, Cause and Effect Analysis, and Root Cause Analysis will help with this.)
Step 3: Score Problems
Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying to solve.
For example, if you're trying to improve profits, you might score problems on the basis of how much they are costing you. Alternatively, if you're trying to improve customer satisfaction, you might score them on the basis of the number of complaints eliminated by solving the problem
Step 4: Group Problems Together By Root Cause
Next, group problems together by cause. For example, if three of your problems are caused by lack of staff, put these in the same group.
Step 5: Add up the Scores for Each Group
You can now add up the scores for each cause group. The group with the top score is your highest priority, and the group with the lowest score is your lowest priority.
Step 6: Take Action
Now you need to deal with the causes of your problems, dealing with your top-priority problem, or group of problems, first.
Keep in mind that low scoring problems may not even be worth bothering with - solving these problems may cost you more than the solutions are worth
Note:
While this approach is great for identifying the most important root cause to deal with, it doesn't take into account the cost of doing so. Where costs are significant, you'll need to use techniques such as Cost/Benefit Analysis, and use IRRs and NPVs to determine which changes you should implement
Key Points:
Pareto Analysis is a simple technique for prioritizing problem-solving work so that the first piece of work you do resolved the greatest number of problems. It's based on the Pareto Principle (also known as the 80/20 Rule) – the idea that 80% of problems may be caused by as few as 20% of causes.
To use Pareto Analysis, identify and list problems and their causes. Then score each problem and group them together by their cause. Then add up the score for each group. Finally, work on finding a solution to the cause of the problems in group with the highest score.
Pareto Analysis not only shows you the most important problem to solve, it also gives you a score showing how severe the problem is.
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