Pareto Analysis

Setting priorities for action

When faced with a range of issues, it is often difficult to know which to work on first. To resolve this dilemma, the most useful thing to do is to apply Pareto's rule. This rule says - "eighty percent of your troubles will come from 20 per cent of your problems". In other words, problems will rarely have equal impact, so it is best to first concentrate on the most important.

The value of this rule is not that it provides a scientifically accurate estimation of the weightings which attach to a range of alternatives (which it does not), but simply that it is a reminder to always look for 'the vital few' issues, and to separate them from 'the trivial many', before attempting to solve problems.

The next step is to identify which particular problems are the most important. This is done by collecting appropriate data and displaying it in the form of a histogram with each measured characteristic shown in descending order of magnitude. Such a histogram is known as a Pareto chart. An example is shown below.

The high value items to the left hand side of the chart are the ones you need to concentrate on first.

Pareto's rule is also known as the 80/20 rule. It was named after Vilfredo Pareto who, in the late 18th century, studied the distribution of wealth in Europe and found that 80% was held by 20% of the population. A number of well publicised business studies during this century showed similar 80%/20% relationships, and claimed for example that, "managers spend only 20% of their time to complete 80% of their work", and "80% of a company's business comes from 20% of its customers". These studies served to confirm the rule as an accepted part of management folklore.

Use the Rule whenever you need to make a choice Apply Pareto's rule, and complete a Pareto chart, whenever a choice has to be made between a number of alternative directions for action. This may be after an analytical exercise has been completed to uncover the possible sources of a particular problem, or after a brainstorming session to generate creative ideas to address an issue.

How to use the rule

After an analysis or ideas generating session, you will have a laundry list of items to evaluate. If the list is a long one (say more than five or six items), try to get it down to a manageable size by putting to one side any factors you reasonably suspect are of lesser significance. Don't discard them entirely because without proper measurement you will never know for certain how significant the factors are. Better just to put them to one side and return to them later if the selected alternatives don't prove successful.

For the remaining factors, decide on the best way to measure their relative significance and collect the data required. Plot the data on a histogram in descending order of importance. Completing the histogram is particularly important if you are working with a team, or need to communicate the results of the data collection in a report or presentation. If you are working with a team, the histogram becomes the focal point for discussing the validity of the findings and how to pursue the issues involved.