The Pareto Principle also known as 80/20 principle has been applied to business analysis and decision making in strategy development, resources management, sales management, quality management, operations management, logistics, etc.
This simple but powerful approach deals with identifying and distinguishing between the vital few and the trivial many business issues. By using this approach businesses can analyze what otherwise looks like random distribution of issues, problems, activities, costs, time, etc.
Not all causes and activities produce the same amount of problems or opportunities.
80% of the results come from 20% of the causes
In order to perform Pareto Analysis organize your data in two columns:
1. Categories (ex: defect types, cost types, activity types, business units, process types, customers, customer segments). Decide what categories you will use and for what time period you want to analyze your data.
2. Number of Occurrences (ex: number of defects, cost amount, number of units, number of hours, number of orders). Decide what measurement you will use for your analysis such as cost, time, percent, and quantity.
Pareto Chart is used to visually report and analyze information. The Pareto Chart is column chart with two vertical axes. The left one measures the frequency while the right one measures the cumulative percentage.
The size of the columns represent the frequency or amount for each category. By creating Pareto Chart you can visually analyze what categories are more significant than others and read their values.
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