Pareto Analysis and Pareto Charts are named after the Pareto Principle, where (approximately) 80% of most effects are due to 20% of the inputs. The idea is to find the 20% of issues, which are causing you 80% of the problems; the Pareto charts are bar charts which let you quickly see major sources of issues – this enables you to focus your efforts on the biggest problems.
The Pareto Principle
The Pareto Principle (or Pareto Effect) is named after economist Vilfredo Pareto, and says that there is an unequal relationship between causes and effects, specifically 20% of causes will usually cause 80% of the effects. It is supposed to apply to all sorts of situations in all areas; Pareto himself used it for showing that around 20% of Italians at the time owned 80% of the land, but it applies to e.g. income distribution, effort in business and causes of business issues. I really enjoyed Richard Koch’s book ‘The 80/20 Principle – The Secret of Achieving More with Less’ on the subject, which helps you to apply it to all areas of your life.
The Pareto Principle has a huge effect in magnifying the advantages of Six Sigma -:
By prioritizing our Lean Six Sigma projects we can bring 80% of the benefits from tackling 20% of the potential Lean Six Sigma projects
80% of the defects will be caused by 20% of the root causes
Using Pareto Analysis in Lean Six Sigma
The time when you will most frequently actively use the effect is usually the last of those – eliminating defects. If you create a chart of all your defects and root causes (a ‘Pareto Chart’), you can quickly find which causes need to be tackled in order to significantly improve your Sigma level.
Creating a Pareto Chart
It’s easy to make a Pareto Chart – you need to measure a large number of defects, and categorize them into the core categories of causes. You then make a bar chart – the x (bottom) axis are issues; either defects or causes of defects/errors, against a y axis of number of defects.
You order the bars in order of number of issues, although you can have an ‘other’ category at the end if there are large numbers of minor issues. You can optionally have a cumulative percentage line above, so that you can more clearly see the proportions of each issue and how they stack up.
There is a Pareto effect if the 80% threshold is hit with only a few categories (generally, less than 20% of the categories), and there is no Pareto effect if the 80% involves a large proportion of the categories (which would mean your process improvement efforts will have to be more far-reaching).
If there is a Pareto effect, you can focus your efforts on this small number of issues, and with relatively little effort (compared to tackling all issues), you can remove 80% of your issues.