What Is Pareto Analysis? (With When and How to Use It)
By Indeed Editorial Team
Published 17 September 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Identifying issues with organisation processes is important in addressing the most critical challenges. Many organisations use specific techniques like Pareto to identify and resolve process issues. Understanding the Pareto technique can help you rank business issues in order of priority, enabling you to make informed decisions. In this article, we explain what Pareto analysis is and why it's useful, discuss what a Pareto chart is, outline when to use this analysis method, provide steps for doing so, list some of its advantages and limitations and give a business example.
What is Pareto analysis?
Pareto analysis is a technique that's useful for making business decisions. It's a graphical method for ranking and mapping problems in a business process. This analysis involves identifying issues in a business process and ranking them from most to least urgent. The purpose is to focus your team's efforts on the business processes most likely to significantly impact the organisation's overall success.
This analysis method uses the Pareto principle, or '80/20 rule'. Vilfredo Pareto, an Italian economist and engineer, proposed that 80% of outcomes result from 20% of the work for a particular event. Although Pareto didn't develop this analysis method, his 80/20 rule is its primary driving force, showing that 20% of issues generate 80% of business outcomes.
Why use this analysis?
The Pareto technique helps identify challenges or strengths within a business by pinpointing the most critical issues to resolve in an organisation. The technique helps to improve an organisation's efficiency by using existing resources to resolve challenges. By identifying the major obstacles impacting success, organisations can spend less time and fewer resources on the less impactful business aspects and more time on the issues affecting profit and revenue.
Related: SWOT Analysis Guide (With Examples)
What is a Pareto chart?
A Pareto chart is a graphical representation of the analysis, which shows the variables within an organisation and the 80/20 ratio between them. For example, a chart may identify that 20% of a call centre handles 80% of the inbound calls, which may be the reason for the downturn in customer satisfaction. When creating a Pareto chart, plotting categories on the X-axis breaks down the presented data.
It's also important to rank the bars in descending order based on how often they occur. The line graph depicts the cumulative percentage of the total occurrence of an event. A Pareto chart typically contains several key components:
X-axis: This includes the data categories presented in the chart.
Y-axis: It represents how many times a specific issue occurs.
Ranked bars: This places the bars on the chart in an order that aligns with the event frequency.
Percentage curve (cumulative): It appears on the Y-axis and travels from left to right across the different data categories.
When to use this analysis method
The Pareto chart is a powerful decision-making tool that can assist with prioritisation in the workplace. Its primary purpose is to identify the most pressing challenges affecting an organisation. You can then determine which issues require the most attention to get the best outcome for a company. For example, when investigating business workflows, you can use a Pareto chart to analyse which workplace steps are likely to have the most significant impact. This can help you to improve those workflows by redesigning them or allocating additional resources.
To apply the Pareto method, it's important that you organise your data into categories and rank them. You can also use a Pareto chart to determine how often an issue occurs within a business. When the issue occurs frequently, it's more likely to require immediate attention. In addition, because the chart represents issues graphically, it can often be easier to understand them, making it a valuable tool to help communicate issues with stakeholders.
How to use Pareto analysis
Follow these steps to create a Pareto chart to help you understand your project's impacts:
1. List your issues
Determine which specific challenges or benefits you wish to evaluate. To do this, develop a list of all your issues with a project. Then, to ensure you haven't missed anything, consider having a team discussion and speaking with the business's clients to identify all potential obstacles.
2. Identify any potential causes
When you have your final list, assign potential causes against each issue. Analyse your project's challenges carefully and get input from your team. Consider if inefficiencies or errors in processes, workflow or business policies are causing the issues. If there's more than one cause, it's important to note this.
3. Assign scores to your issues
The next step is to score the issues by considering the impact and importance of each one. Before you can find a solution, it's important to assign a number to each that helps prioritise it based on the adverse impact it might have on the organisation. This impact often depends on your specific project, its challenges and goals. For example, you may choose a scoring model from one to five, where one means 'no adverse impact' and five means 'high adverse impact'.
4. Assign your issues into groups
Depending on the number of project issues you identify, you may wish to organise these into groups. You can consider organising these challenges by score, type or relevant characteristics – for example, system or customer experience issues. Grouping your challenges can be a valuable way to help you develop solutions aligned with each category.
5. Add up your scores
After assigning scores and categories, it's time to do your calculations. For each category, add up each of the scores. The one with the highest total number is the highest priority for developing or sourcing solutions.
6. Create an action plan
Starting with the highest-scored groups, think about the root causes of each issue. Then, consider discussing ideas with your team members to help find strategies to resolve them. Next, work through a strategy and implementation plan for your high-priority issues before moving on to others. You can solve challenges more efficiently by allocating resources to high-priority and high-impact issues. This approach allows you to target challenges that are more likely to impact business areas like sales, revenue and customer retention.
Advantages and limitations
Here are some common advantages and limitations to using this analysis type:
One advantage is that it helps in identifying issues. By identifying these, you can work out the root causes of an organisation's challenges. Other advantages include:
Allowing an organisation to resolve challenges with the highest priority first
Helping you to understand the cumulative impact of an issue
Giving you a useful planning tool to help create an action plan
Assisting you in focusing on decision-making and problem-solving
This analysis method doesn't offer or provide solutions. It only focuses on issues. Another limitation is that it focuses only on past data, so it may not be relevant if mapping future scenarios.
Example of using the Pareto method at work
The following is an example of using this analysis to identify issues. The Pareto chart can help determine each category's total number of occurrences, and the company can sort the data in descending order, starting with the highest number of occurrences. The data represents the cumulative delay percentage for each of the categories. Looking at the chart, the company determines that using a third party to finalise the overseas shipping causes the most considerable delays. To improve this, it audits the third parties' processes and puts the shipping contract to tender to determine whether partnering with another provider is worthwhile.
Here's an example of a logistics company:
LogisticsX Company wants to understand which business processes are causing delays with its international shipments. It uses a Pareto analysis to chart its data and determine how frequently delays occur in its operations. The first step is identifying categories to group the shipment processes into. These categories include specific processes relating to shipping. For this company, the categories include:
Order generation via customer online purchases
Shipping to international locations
Using third parties to complete overseas shipments
The next step is establishing the most appropriate measurement for each category. Because this issue focuses on delays, the company uses the number of days it takes to complete each of the above categories as the measure. After identifying this measurement, the next step is to select a time period. The company uses a timeline of two weeks. Finally, it's important to identify how frequently delays occur in each category. For example, if the turnaround time for packaging orders is two days, the chart highlights all the instances when packaging took longer than two days.
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