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8.2 Pareto Analysis

Pareto analysis is a statistical technique in decision making that is used for selection of a limited number of tasks that produce significant overall effect. It uses the Pareto principle, the name derives from the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. Pareto later carried out surveys on a number of other countries and found to his surprise that a similar distribution applied.

Pareto analysis is a formal technique useful where many possible courses of action are competing for your attention. In essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most effective actions that deliver a total benefit reasonably close to the maximal possible one.

8.2.1 Example

Step 1: Frequency Analysis

The first step of the Pareto analysis is to gather data on the frequency of causes (Table 1).

Table 1.

Pareto analysis

Possible cause	%
A	1
B	1
C	2
D	2
E	13
C	2
D	2
E	2
F	6
G	2
H	1
I	1
J	16
K	1
L	2
M	1
N	14
O	12
Q	9
R	10
Total	100

Step 2. Ranking Causes

To identify the most important causes, we rank the causes based on the frequencies they found in their survey (Table 2).

Table 2.

Ranking

Possible cause	%	Cumulative %
J	16	16
N	14	30
E	13	43
O	12	55
R	10	65
Q	9	74
F	6	80
C	2	82
D	2	84
C	2	86
D	2	88
E	2	90
G	2	92
L	2	94
A	1	95
B	1	96
H	1	97
I	1	98
K	1	99
M	1	100

Step 3: Pareto Graph

We draw a horizontal axis (x) that represents the different causes, ordered from the most to least frequent. Next, we draw a vertical axis (y) with cumulative percentages from 0 to 100% (Figure 1).

Figure 1.

Pareto chart

Now it is easy to see that approximately 7 factors are responsible for 80% of problem. The other 13 factors are responsible for only 20%.