How To Analyze a Pareto Diagram

Share on facebook
Share on twitter
Share on linkedin
Share on email

When it comes to data, it’s important to not only be able to safely store and format your pertinent information but to present it in a fashion that is easily understandable for everyone. You could opt for standard bar graphs and pie charts, but sometimes you need more than just flat numbers. Data analysts and decision-makers alike are now taking advantage of Pareto charts and diagrams for a new kind of insight to afford themselves the greatest impact on their organization.

What is a Pareto chart?

img

A Pareto chart is a powerful tool that helps viewers understand the factors that influence outcomes, arising from what’s known as the Pareto principle. This is the principle that finds 80 percent of outcomes arise from 20 percent of causes. Pareto charts and diagrams help provide the best view of the Pareto analysis. The 80/20 rule applies to almost every scenario in the business and non-business worlds. Essentially, almost any aspect of an organization reflects the Pareto rule by having a chart that displays figures to help identify and resolve problems.

A Pareto chart at its core is a column or bar chart overlaid with a line chart. The bars are displaying information aligning to a left-hand scale, showing the percentage of something on a scale up to 100% on the right-hand side. Pareto diagrams should always start with the largest of the individual values on the left, with every bar afterward from left to right in descending order. Then, the line graph will start on the bottom left and get cumulatively larger until that line chart reaches 100 percent on the top-right side of the chart.

The Pareto Principle

img

Also known as the 80/20 rule, the Pareto principle was first publicized in 1937 by Joseph Juran, who named this law of the vital few after Italian economist Vilfredo Pareto, the first person to record this phenomenon in the late 1800s. This is after Pareto noted that in many places, the 80/20 distribution was a common trend in a lot of facets of life. He found that 80% of Italy’s land was owned by 20% of the population, with surveys of other countries revealing similar distribution patterns. The United Nations Development Program has identified the Pareto principle in taxation and income as well.

Sports, computing, safety, and the health & social wellbeing sectors have all turned to the Pareto principle to identify cumulative impact from the source of a problem to determine the way to improve upon the data inputs available. With a focus on problem-solving, businesses have found that Pareto diagrams and charts are making it easier to convey issues while figuring out the next step for an organization. Pareto analysis has shown the success of marketing campaigns, finding that 20% of advertising attracts 80% of the marketplace. If 20% of something yields more positive outcomes, businesses will pour more resources into those efforts.

When should a Pareto chart be used?

img

A Pareto chart is ideal when companies need to communicate important issues to stakeholders or need to prioritize their tasks. A Pareto diagram needs to have data that can be measured in terms of duration, cost, or frequency. There also needs to be a timeframe established enforcing set priorities to make the most of the best tools. To highlight the 80/20 rule, 20% of data can be highlighted using a different color to indicate that it is the area of business that needs attention. Pareto charts are best for process improvement, identifying defects in a supply chain while also spotting strengths in a corporate work cycle. These charts empower better decision-making and data management to not only meet deadlines but take the best step forward from each project.

Share on facebook
Share on twitter
Share on linkedin
Share on email

Related Content

Contact us