ThePareto Principal

…. also

Known By

Many Other Names

Vilfredo Pareto,

1848-1923

A ‘GREAT” Management Tool .. With Many Names!

The “Pareto Principle”

“The Law of The Vital Few

and the Trivial Many”

The “Power Law”

“Participation Inequality”

The “80 – 20 Rule”

ABC Analysis Technique

Vilfredo Pareto,

1848-1923

Introducing “Alfred PARETO”

In 1879, the famous Italian economist Alfred

Pareto, noticed that 80% of Italy’s wealth was

controlled by 20% of the population.

This concept is known as “Pareto’s Law” or

“Pareto’s Rule” or “Pareto Principle” or “Principle

of imbalance” or simply “The 80/20 Rule”.

Subsequently, people in various disciplines and

professions noticed that this same 80/20 applied,

in a broad way, to a wide range of phenomena. Dr.

Joseph Juran also recognized this concept as

universal that could be applied to many fields. He

coined the term vital few and useful many.

Introducing Dr. Joseph M. Juran

Quality Management pioneer, Dr. Joseph Juran

recognized a universal principle he called the "vital

few and trivial many".

In an early work, a lack of precision on Juran's part

made it appear that he was applying Pareto's

observations about economics to a broader body of

work.

The name Pareto's Principal stuck, probably because

it sounded better than Juran's Principle.

As a result, Dr. Juran's observation of the "vital few

and trivial many", the principle that 20 percent of

something always are responsible for 80 percent of

the results, became known as Pareto's Principle or

the 80/20 Rule.

Dr Joseph M. Juran

The Pareto Principle – aka

The 80 – 20 Rule

Vilfredo Pareto,

1848-1923

The Pareto Principle – aka

The 80 – 20 Rule

The VITAL FEW

Vilfredo Pareto,

1848-1923

Examples Pareto Principle / 80 – 20 Rule

20% of the Code

Has 80% of the Defects.

Vilfredo Pareto,

1848-1923

Examples Pareto Principle / 80 – 20 Rule

20% of the Modules -

Consume 80% of the Resources.

20% of the Modules - Consume

80% of the Execution time.

20% of the repairs -

Consume 80% of repair costs.

20% of the enhancements -

Consume 80% of adaptive

maintenance costs.

20% of the tools -

Experience 80% of the tool

usage.

Vilfredo Pareto,

1848-1923

Examples of

Pareto Principle / 80 – 20 Rule

Input Output

Products

EffectCause

Efforts

Pareto Principle Also Applies to Inventory $ & Purchase $

Purchase $ Inventory $

80% $$$$$$$$$$$$$$$$$$$$$$$$$$$$

$$$$ 20%$$

80%

20%

Pareto Principle Also Applies to Purchases & Suppliers

Suppliers Purchases

Pareto Principle Also Applies to People

In-Put Output

Vilfredo Pareto,

1848-1923

Like Roads, Pareto Charts Can Be ……

COMPLEX

SIMPLE

OR

Vilfredo Pareto,

1848-1923

What Makes The Charts “Complex”?

Our initial “Simple” Charts will only involve

examination of the “Production of Doors” with

only:

6 Manufacturing Defects,

Over a Period of 31 Days.

Now visualize the greater complexity of Charts for;

An Inventory of 30,000 + Stock Keeping Units /

Items

Over a Period of 365 days.

When we are comfortable with the “Process” – the

“Complex will become Simple”

Vilfredo Pareto,

1848-1923

SO ……

In this Session we will start with simple

“Manual” Bar Charts - to learn the

“Process” …..

Then ……

In the NEXT Session “ABC Analysis” we will

move on to more complex Charts using “MS

Excel” to apply the “Process” to large

amounts of (Real Life) Data

Vilfredo Pareto,

1848-1923

Variables & Data

Variables and data can be:

Qualitative = the answer is NOT a number;

or

Quantitative = the answer IS a number.

REMEMBER - In Exercise 1Chart we will only be

examining ONE “Quantitative” VARIABLE –

“Frequency”

Vilfredo Pareto,

1848-1923

Back to BasicsThe Pareto

Frequency Diagram

The Pareto Frequency Diagram is a bar chart

which displays the causes of various defects, in

order, from:

The “most frequent” - to

The “least frequent”

so that you can focus attention on the Most

Frequent problems (which may or may

NOT be the most important – just the most

Frequent!.

Vilfredo Pareto,

1848-1923

Pareto Frequency DiagramEXERCISE # 1

Wooden glass doors are produced on a six day

work week.

At final checkout before shipping, the doors are

inspected and each is classified as conforming or

non-conforming and specific Defects are identified

for each non-conforming door.

The Next 2 Slides shows details of

“Nonconforming doors” or “Door Defects” identified

by day and by type of Defect:

Vilfredo Pareto,

1848-1923

“Door Defects” Defined

Day: Day Door is Mfg &

Inspected

Window: Window misaligned

Discolor: Discolor

Handle: Handle hole missing

Hinges: Hinges wrong

Rough: Rough wood

Glass: Broken glass

Warped: Warped

Vilfredo Pareto,

1848-1923

Day Defects Detected Each Day

Window Discolor Handle Hinges Rough Glass Warped

1 1 3   2 7 1 4

2     2   2 3 3

3     2 1 4 4 1

4 2 3 3 1 1 1 1

5   1   2      

6   2 2 4   1 1

8 1   1  1 3     

9     1  2      

10   2    3 2     

11     5        

12   1 1 4 4 1  

13 1      4      

15       2      

16         2    

17   2  2    1    

18   1          

19       6 3     

20       3 2    

22   2 1        

23       3      

24     1 2     1

25   2 2 3 2 1 2

26 1 2 3 4      

27   2   3  2   1

29   1  2  3      

30       2      

31       5      

Total 6 24 28 60 24 12 14

Defects Detected Per Day!

Vilfredo Pareto,

1848-1923

1 2 3 4 50

1

2

3

4

5

6

7

8

Window

Discolor

Handle

Hinges

Rough

Glass

Warped

Can You See A Pattern?

Nor can I (yet)!

Bar Chart of Defects by DayCan You Identify The Problem Area?

Vilfredo Pareto,

1848-1923

Pareto Frequency Chart

EXERCISE # 1

Using the Data from the

“Defects Detected By Day”

Slide and the Blank “Graph” in

your Notes, make up a Pareto

“Frequency” Chart (a Bar

Chart Format) with the:

Highest Frequency /

Tallest Bar on the Left, &

Lowest Frequency /

Shortest Bar on the Right.

Exercise # 1Mfg Fault Frequency Chart

Exercise 2 =Create the “Pareto Curve”

for the Door Defects

#Exercise 2 Steps =

1. Convert the “Number” of each fault to a % of total

Defects & calculate the “Cumulative %” of Defects.

2. Create a Bar Chart that Show the % of Individual

Defects (Tallest on the Left) AND

3. Include the Cumulative % of the Defects in the Chart

THEN

4. Draw a line that joins the tops of each of the

Cumulative % “Bars” (That “Curved Line” is the

“Pareto Curve”

%

Exercise 2 = Convert Chart 1 to “%” of Problems + Add a “Pareto Curve”

to the New Chart

Complete Exercise # 2

“Pareto Frequency Chart” with Pareto

Curve for Manufacturing

Defects

Your Chart Should Look Like

This

Vilfredo Pareto,

1848-1923

QUESTION?

Are the “Hinges” the MOST

IMPORTANT Problem to be

solved??

YES? or NO?

NO! It is the “Most Frequent” problem

- but we can not be sure if it the

most important until we take into

account “Other Variables”

Vilfredo Pareto,

1848-1923

Another Variable To Consider!

We know the “Most Frequent”

Fault but to get a firm base for

a “Decision” we need to

consider another key

“Variable” …….

“The Cost to fix each Fault!

Vilfredo Pareto,

1848-1923

EXERCISE # 3 Pareto “Fault Costs” Chart

We will now use the same

technique with the “Cost “

Data from the Next Slide to

create a Pareto Fault “Cost”

Chart.

Then we will know the

relative “Cost” of each Fault!

= 1 step closer to a “Decision

Chart”

Exercise 3Pareto Cost Chart

A Pareto Diagram can display the costs of various defects, in

order, so you can focus attention on the most important

problems.

ASSUME the following costs for each of type of defect.

Vilfredo Pareto,

1848-1923

EXERCISE # 3 Pareto Fault “Cost” Chart

Using the Data from the previous

Slide and the Blank “Exercise 2

Graph” in your Notes, make up a

Pareto “COST” Chart (a Bar Chart

Format) with the:

Highest COST / Tallest Bar on

the Left, &

Lowest COST / Shortest Bar

on the Right.

Vilfredo Pareto,

1848-1923

QUESTION?

We now know “Hinges” are the MOST FREQUENT fault !

AND

We also know that “Hinges” are

the MOST EXPENSIVE fault

SO …

You tell me – Which is the MOST

IMPORTANT fault to fix FIRST!

Vilfredo Pareto,

1848-1923

What Else Do We Need To Do To Make a Valid Decision?

Vilfredo Pareto,

1848-1923

EXERCISE # 4Pareto Decision Chart

The MOST IMPORTANT Fault to be corrected can

not be identified from the date we have so far;

Now we will make up a “Pareto Decision Chart”

that we clearly identify the “most important fault”

that must be corrected immediately.

Use the same process to construct your Chart

and the data for inclusion in your Chart is:

Frequency of each Fault

Multiplied By

The Cost of each Fault. &

Converted to % of Total Costs

Exercise 4 - Pareto Chart “Cumulative Cost of Faults”

Steps Taken:

1. # of Faults x $

Cost of a Fault

= Total Costs

2. Sort into

Sequence

Highest Total

Cost to Lowest

Total Cost

Exercise # 4 Create a

“Pareto Decision Chart” that Shows You To Identify the most

Important 80% of the Cost of Defects to be

Attacked!

Your Chart Should Look Like

This

Vilfredo Pareto,

1848-1923

Pareto Charts

Pareto Charts Defined

Pareto charts are used to identify and

prioritize problems to be solved.

They are actually histograms aided by the

80/20 rule adapted by Joseph Juran.

Remember the 80/20 rule states that

APPROXIMATELY 80% of the

problems are created by

APPROXIMATELY 20% of the

causes.

Vilfredo Pareto,

1848-1923

Have YOU Become An 80/20 Individual?

An 80/20 Individual is a person who has learned

that in order to have success, they don't need to

be increasing their effort by 110%. Most people

who do this are simply doing the wrong things

more often.

Instead, an 80/20 individual looks at the 20% that

is responsible for 80% of their results and then

they focus on improving this 20%!

Is it really that simple? ………. Yes!

Once you are taught how and what tools to use

to improve your results, the only question left

is ..... Will YOU take action?

Vilfredo Pareto,

1848-1923

Any Questions?