Pareto Chart | Diagram | Pareto Principles | Case Study

 What is a Pareto Chart?

→ A Pareto Chart is a bar graph representing the frequency or impact of different causes, and the bar is arranged with the longest bars on the left side and the shortest on the right side.

→ This bar graph is combined with a line graph representing the cumulative total.

→ It was invented by Mr. Vilfredo Pareto.

→ This tool is a very good tool for prioritization.

→ The Pareto Chart is the most popular tool among the 7 QC Tools.

Table of Contents:

• What is a Pareto Chart?
• History
• What is the Pareto Principle or 80/20 Rule?
• When to Use Pareto Chart?
• Why to Use Pareto Chart?
• Key Elements of Pareto Chart
• How to make a Pareto chart?
• Limitations of Pareto Chart
• Benefits of Pareto Chart
• Conclusion

History:

→ Vilfredo Pareto was an Italian engineer, sociologist, and economist.

→ Vilfredo Pareto observed that: "80% of the land in Italy was owned by about 20% of the population."

→ This observation led to the formulation of one important principle which states that "roughly 80% of effects come from 20% of causes."

→ This principle is known as the Pareto Principle.

→ The Pareto principle was named after Vilfredo Pareto.

→ He also contributed to the fields of sociology and mathematics.

→ Dr. Joseph M. Juran popularized the Pareto chart in the field of quality management.

→ Dr. Juran's work has explained to businesses to focus on "vital few" problems rather than the "trivial many".

→ That means we need to focus on very critical and high-impact 20 % problems rather than the 80% problems having less impact and less critical to the businesses.

→ After his work, this graph became an important tool in quality improvement initiatives.

→ The Pareto chart is an integral part of the Six Sigma Project and Lean Manufacturing Methodologies.

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What is the Pareto Principle or 80/20 Rule?

→ Italian economist Vilfredo Pareto observed that "roughly 80% of the effects come from 20% of the causes".

→ This principle is known as the Pareto Principle.

→ The Pareto Principle is also known as the 80/20 rule.

→ Let us take more examples of the Pareto principle for better understanding.

→ 80% of the Problems come from 20% of the causes.

→ 80% of the Output comes from 20% of the Input.

→ It Distinguishes between Vital Few from Trivial Many.

→ 80% of the Results come from 20% of the effort

When to Use Pareto Chart?

• This tool is used for Prioritization
• It is used to calculate the potential impact of things
• It is used for identifying the vital few and the trivial many
• Defect and customer complaint analysis
• Identify areas of improvement
• Prioritize efforts, and allocate resources effectively

Why to Use Pareto Chart?

• It visually represents the critical improvement area and potential causes.
• Prioritization of issues
• Efficient resource allocation
• It enables data-driven decision making
• Very easy to communicate the opportunities for improvement.
• Very easy to understand and use

Key Elements of Pareto Chart:

➝ Now we will understand about the key elements of the chart.

➝ These key elements help us to create and analyze the chart.

⏩ The four Key Elements of the Pareto Chart are:

1. Bars
2. Line Graph
3. Axes
4. Categories

➝ Now we will understand all key elements in detail.

(1) Bars:

➝ The bars represent the frequency of different categories.

➝ The categories are usually arranged in descending order from left to right.

➝ So we can say that the most significant causes are arranged on the left in the graph.

(2) Line Graph:

➝ In this graph the cumulative line graph is used.

➝ A cumulative line graph is plotted above the bars and it is used to show the percentage.

➝ The percentage we need to plot on the secondary axis of the graph.

➝ The cumulative percentage is calculated based on the cumulative count of the different categorical data.

(3) Axes:

➝ This graph contains two axes which are the primary axis and the secondary axis.

➝ The left vertical axis represents the frequency or impact of each category which is called as primary axis.

➝ The right vertical axis represents the cumulative percentage, ranging from 0% to 100% which is called the secondary axis.

(4) Categories:

➝ The categories are the types of issues or we can say the specific causes.

➝ We can simply understand categories as during manufacturing different types of defects are generated that we can consider as categories.

➝ We need to count the frequency of the data to construct the graph.

➝ Catagories name should be mentioned in the horizontal axis.

How to make a Pareto chart?

➝ Now we will create a graph with an example of defect analysis in a manufacturing company.

⏩ Five Steps for Making a Pareto Chart are:

1. Identify and Define the Problem
2. Data Collection
3. Soring the Data
4. Calculate Cumulative Data
5. Construct the Graph
6. Analyze the Chart and Prepare an Action Plan

➝ Now we will learn each step with detailed examples.

Step 1: Identify and Define the Problem:

➝ In the very first step, we will identify and define the problem.

➝ So in our example we will refer to the defect analysis problem.

➝ Then we need to determine the data collection method and period of data collection.

➝ Design a separate Check Sheet if necessary.

➝ Identify the different categories of defects for defect analysis.

Step 2: Data Collection:

➝ The second step is data collection.

➝ In this step, we will collect the data related to different category-wise defects.

➝ We can collect this data from various sources such as quality control logs, customer complaints, warranty failures, market recalls, or any other relevant source.

Step 3: Sorting the Data:

➝ After data collection, we need to sort the data into different categories.

➝ For that we need to list down all possible categories of defects and note down the frequency/count of the defect.

➝ So all categories have respective numbers of count.

➝ The data should be quantifiable or it should be quantitative.

➝ We will use this data to construct the graph.

Step 4: Calculate Cumulative Data:

➝ The fourth step is to calculate the cumulative total land percentage of data.

➝ In this example we need to calculate cumulative defect count and percentage.

➝ Refer to the below picture for better understanding and clarification.

Step 5: Construct the Graph:

➝ Now after collecting all data and calculating the cumulative percentage, we will create a chart.

➝ For that we need to draw the axes, bars, and cumulative percentage line, and label the chart.

➝ This way we can easily make the Graph.

➝ Refer to the below picture for a better understanding.

Step 6: Analyze the Chart and Prepare Action Plan:

→ Now we need to analyze the chart and identify Vital Few problems from the Trivial Many by using the 80:20 principle.

→ Let's say in our example we are taking defects D, E, F, and A for further action because the contribution of these defects is almost around 81%. it is as per the 80:20 Rule.

→ It is not mandatory to take defects up to 80% we can take only the first two defects which contribute around 65% problem.

→ Now we will take action on these defects by finding the root cause with the help of any root cause analysis method such as the Cause and Effect Diagram, 5 Why analysis, Fault Tree Analysis, etc.

→ The bar graph shows the number of defects in descending order and the line graph shows the cumulative percentage of the defect.

Limitations of Pareto Chart:

• It does not identify the root cause of the problem
• Does not show a trend or pattern of collected data 
• It highly relies on the quality of data collected
• Wrong categorization of data leads to wrong prioritization
• Not suitable for all types of data

Benefits of Pareto Chart:

• We can easily distinguish between Vital Few and Trivial Many
• It is a good problem-analysis tool
• Continuous Improvement
• It helps a team to focus on causes that will have the greatest impact when solved.
• By using 20% of resources we can solve 80% of problems.
• We can easily understand the impact of the defect on our production
• It improves our decision-making ability
• Increase efficiency and productivity
• This chart is used across different sectors and departments

Conclusion:

→ The Pareto chart is an essential tool in quality management, business analysis, and problem-solving.

→ This chart visually represents the data and helps to prioritize the actions.

→ By applying the Pareto Principle, or the 80/20 rule, we can optimize our resources and improve efficiency.

→ Help us with data-driven decision-making.

→ It promotes a continuous improvement culture within the organization.

→ We can say that the Pareto chart is a powerful tool for prioritization.

→ Anyone can use this chart to improve the efficiency, effectiveness, and overall performance of the business.