Pareto Principle

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Pareto Principle:

By: Ali Ferguson, Miguel Fernandez & Michael Moore Pareto Principle

Other Names::

Other Names: 80/20 rule Law of the vital few Principle of factor sparsity Definition: 80% of consequences come from 20% of the causes Has rule-of-thumb applications in many subjects: business, economics, computers, etc. Also commonly misused!

Background:

Background Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto because Vilfredo observed that 80% of the land in Italy was owned by 20% of the people. Joseph used the principle and observed that 20% of his peapods contained 80% of his peas.

Use in Life::

Use in Life: Authors have said that every intelligent person should apply this theory to their every day life because it can multiply the effectiveness of an individual. 20% of what matters of what you do in a day is what produces 80% of your results.

Related to business & economics:

Related to business & economics The formula 80/20 rule is a common rule of thumb in business. Ex: 80% of your sales comes from 20% of your clients. In the financial world the principle is known as profit risk: 20% or fewer of a company’s customers are generating positive income while 80% or more are costing the company money. For economics its used with the relationship between economy and wealth. When Pareto noticed it with Italy’s land he did a survey on other countries and noticed that the results were the same as Italy’s (80% of the land is owned by 20% of the population)

Economics cont.:

Economics cont. In 1992 there was a report that showed a distribution of global income to be very uneven. It stated that 20% of the world’s population controlled about 80% of the world’s income. It has also been used to classify the widening economic inequality in the U.S. to a skill based technical change. That means that the U.S. has more people that are more educated to handle the technological change in society.

In computer world…:

In computer world… The Pareto principle can be used in the computer world by stating that 20% of the most reported bugs, 80% of the errors and crashes would be eliminated. This means that if more people reported their computer problems the less their computers would crash. The principle can also be used in the computer graphics industry. The saying goes that 20% of rays intersect 80% of geometry.

Other uses…:

Other uses… The Pareto principle can also be used in quality control. It’s the basis for the Pareto chart which is one of the key tools used in total quality control and six sigma. It also serves as a foundation the ABC-analysis and XYZ-analysis. ABC-analysis: classifies raw materials based on their consumption during a particular time period XYZ-analysis: more used in relation of the customer demand for finished goods; x is high demand, y is medium demand and z is very low demand.

Pareto Chart::

Pareto Chart: A Pareto chart is a bar graph. The length represents frequency or cost and are arranged tallest to shortest. You use a Pareto chart when analyzing data about the frequency of problems or causes in a process, when there are many problems or causes and you want to focus on the most significant, when analyzing broad causes by looking at their specific components and when communicating with others about your data. Also called: Pareto diagram, Pareto analysis Variations: weighted Pareto chart & comparative Pareto charts

Pareto Chart Procedures::

Pareto Chart Procedures: Decide what categories you will use to group items. Decide what measurement is appropriate. Common measurements are frequency, quantity, cost and time. Decide what period of time the Pareto chart will cover: One work cycle? One full day? A week? Collect the data, recording the category each time. (Or assemble data that already exist.) Subtotal the measurements for each category. Determine the appropriate scale for the measurements you have collected. The maximum value will be the largest subtotal from step 5. (If you will do optional steps 8 and 9 below, the maximum value will be the sum of all subtotals from step 5.) Mark the scale on the left side of the chart. Construct and label bars for each category. Place the tallest at the far left, then the next tallest to its right and so on. If there are many categories with small measurements, they can be grouped as “other.” Steps 8 and 9 are optional but are useful for analysis and communication. Calculate the percentage for each category: the subtotal for that category divided by the total for all categories. Draw a right vertical axis and label it with percentages. Be sure the two scales match: For example, the left measurement that corresponds to one-half should be exactly opposite 50% on the right scale. Calculate and draw cumulative sums: Add the subtotals for the first and second categories, and place a dot above the second bar indicating that sum. To that sum add the subtotal for the third category, and place a dot above the third bar for that new sum. Continue the process for all the bars. Connect the dots, starting at the top of the first bar. The last dot should reach 100 percent on the right scale.

Pareto Chart Examples from site::

Example #1 shows how many customers complaints were received in each of the 5 categories. Example #2 takes the largest category from #1 and breaks it down and shows cumulative values Pareto Chart Examples from site:

Resources::

Resources: http://www.gassner.co.il/pareto/ http://wiki.answers.com/Q/Distinguish_ABC_and_XYZ_analysis http://en.wikipedia.org/wiki/Pareto_principle http://asq.org/learn-about-quality/cause-analysis-tools/overview/pareto.html