What is a Pareto Chart? How Does It Work and How to Create One?

Businesses can take severe losses by making wrong decisions and that's why making informed decisions is very crucial. Today, we have multiple tools and techniques that can help gather and organize data for efficient decision making and one of those is the Pareto chart. It is a unique type of chart that focuses on the 80-20 rule.

In this article, we will discuss further details of its goals, applications, how to create it, etc.

Quick Overview of Pareto Chart

A Pareto chart is a unique type of chart that focuses on both bar graphs and line graphs. Each bar in this chart is used to represent different data categories. These are designed to be presented in descending order of frequency on the left vertical axis of the chart.

The right vertical axis contains data on the cumulative percentage. We use this chart to identify the “vital few” categories that are crucial for the problem we are focusing on. This way, we can route our efforts and resources toward problem-solving more efficiently.

This chart is based on the idea of the Pareto principle which suggests that around 80% of the problems we face are only because of 20% of the issues.

What is the goal and importance of the Pareto chart and Pareto analysis?

Whether we consider its importance for project management or other business fields, it always focuses on efficient problem-solving through the means of prioritization. This chart helps us identify the most crucial causes behind problems that are the vital few and when we focus on them, bigger problems can be easily solved by working on smaller root causes behind them.

What are the applications of a Pareto Chart?

As mentioned above, the Pareto chart is applicable in various fields of life. Some of its applications and how it works there are discussed below:

1. Manufacturing and quality control

Pareto charts serve manufacturers in pinpointing the most common reasons for product defects or factors having the most influence over production problems. Companies can achieve a lot by addressing that only a few causes can lead to almost all of the problems (the 80/20 rule).

2. Business management

Corporations implement a variety of management decisions employing Pareto charts including determining major product revenues, key expenses to control, or major causes of customer satisfaction. This means all resources and efforts can be directed where they are expected to generate the most profit.

3. Healthcare

The Pareto analysis in healthcare is very useful in finding out the highest reasons that lead to medical errors, patient grievances, or kinds of diseases mostly common among a particular group of people. These are not just mere insights, but they help clinicians in narrowing their focus on the core areas of patient care and operational efficiency.

4. IT and software development

Pareto charts are utilized by software developers to rank bugs or issues based on their occurrence/frequency and their effect on the system. Priority addressing of the most important errors enables developers to move to the issues that affect the stability and the performance of the software faster.

5. Supply chain management

In Supply Chain Management Pareto chart is a standard tool that is applied for the identification of the top elements that affect supply chain disruptions, cost increase, or inefficiency. This can provide clarity to the inventory quantities, delivery times, and cost reduction processes by focusing on the most important aspects.

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How to do your Pareto analysis and draw the Pareto chart?

Pareto Analysis is a process that involves multiple steps considering all the stakeholders of a problem. This way, the analysis can help in decision-making to prioritize your efforts and solve your problems. Below are all the steps you must follow for Pareto analysis and creating your Pareto chart.

1. Problem identification

Clearly define the issue you want to choose from. It is of utmost importance that the problem be singled out relevantly so that your analysis is forceful and effective.

2. Choosing categories for measurement

Decide whether you are going to divide the analysis based on the categories or not. These can be the kinds of defects, reasons for delay, motives for customer complaints, etc. but classes can depend on the nature of the problem you are dealing with.

3. Setting your measurement standards

Determine what factors you consider under each category. The basic unit of measurement is given access to frequency (which happens after an interval), cost (whose effect is on the business), or time (holds, how much time something takes).

4. Data collection

Gather data on each category within a dated time frame. Make sure your data collection techniques are religiously followed and accurate to ensure the reliability of your analysis.

5. Data sorting

Rearrange these categories from the topmost important to the least one by one according to the measurement standards you have set. In most cases, it involves counting them by frequency, cost, or time as equally important but more frequent.

6. Percentage calculation

Find out what proportion a category occupies among everything. This is another factor for breakpoint determination.

7. Plot Pareto chart

Plot your data into a chart. The left vertical axis should contain your measurement standard (e.g., frequency, cost, time) while the right ones should represent the cumulative percentage and the horizontal behaviors should be listed by categories. Bars will be the means to measure the categories and a line graph will be used as the representation of the percentages.

8. Pareto chart analysis

Separate the "vital few" categories that make most of the problem (approximately 80% of the problem is made by the first 20% of the categories). These areas of focus are where you lie for problem-solving.

9. Design and implement adequate strategies

Set up and establish the necessary strategies to deal with the key issues. This can be done by simplifying the process, giving priority to quality improvement, or redistributing resources.

10. Monitoring and updates

Continuously monitor the impact of your efforts on problems that are yet to be identified. Meanwhile, be prepared to adjust your project management strategies according to future dynamics and feedback.

What are the benefits of a Pareto Chart?

There are multiple benefits of using the Pareto chart including the following:

1. Easy to interpret

Pareto charts present the data in a relatively simple format, which means that even without any calculations and statistics it becomes obvious when looking at them what is the biggest problem in the process or a system. This simplicity allows faster and deeper analyses, which is why Pareto charts become very useful devices in case we need to show the resources demanding special attention.

2.Easy to upgrade and improve

Updating Pareto charts with the latest information is easy, resulting in a couple of charts wherein the changes can be tracked over time. Hence, it meets the needs of both continuous process improvement and effectiveness monitoring of changes that were applied.

3. Perfect informed decision-making

Pareto charts facilitate the identification of the major contributors to a problem and hence, resources can be allocated more efficiently and tackled to bring out solutions that will have the highest impact. Such a process enables people to do the right deeds, especially with the inclusion of Gantt charts which help in scheduling and planning.

What are the demerits of a Pareto Chart?

The Pareto chart is great for determining adequate problem solutions, but it comes with certain demerits as well. Here are some demerits that you must know about:

1. Oversimplifications of problems

Pareto charts help recognize large issues where major time and effort should be dedicated, but they fail to clearly define underlying causes or relationships between smaller issues. Due to this issue, one may only get basic knowledge about them.

2. Dependency on static data analysis

Pareto graphs are designed for in-depth analysis of one-dimensional databases, thus, presenting only a stationary view of quantitative changes rather than dynamic ones.

However, due to their static nature, Pareto charts are more suitable for presenting the progress of a project as well as the ongoing problems that the project is facing than for capturing the dynamic nature of the problem, unlike Gantt charts which can track progress dynamically.

Conclusion

Whenever we get a lot of options to choose from, it always ends up confusing. That is one of the problems businesses and project management departments face. There are so many factors involved behind every business element that finding the optimal solution to start with becomes difficult and informed decision-making becomes vital.

A Pareto chart is a unique chart type that can be made with Pareto analysis and the Pareto principle of 80-20. This chart can help identify which problems have the highest weight and what are the root causes behind them. This way, problem-solving becomes better with improved resource allocation.