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What Is A Pareto Chart? Principle, Procedure and Rules

Pareto Chart is a bar chart sorted by frequency, with the most important events or items being represented on the far left-hand side. Named after Vilfredo Pareto, it is traditionally used to present a graph of the distribution of wealth, in economics, manufacturing, engineering, etc.

Pareto Chart is a bar chart sorted in descending order from the highest frequency to the lowest frequency from left to right. The height of the bars reflects the frequency or the impact of the problems. The Pareto Chart assists the quality improvement team in focusing on areas of improvement with the greatest impact. A Pareto Chart can be either a simple bar chart in descending order or a more sophisticated, Dual Y-Axis chart with a cumulative percent line and an 80% line included in the chart. The X-axis or the horizontal axis in a Pareto Chart displays categorical data, also called nominal data. In other words, it’s data that could be grouped by name. It’s non-numeric data, so you can’t take the average or the median of this particular data. And the categories generally reflect either problem areas in a process or the causes of a problem.

The Pareto Chart is a Dual Y-axis chart. That’s why it has a Y-axis on the left and the right. The left hand or the vertical axis is the frequency of observations. In other words, the number or the count of cases or observations. The left y-axis can also be presented as a percentage. The right Y-axis, or, the right-hand vertical axis, is the cumulative percent. It measures the cumulative percent line. In other words, the cumulative total of data relating to each bar. 

The last component of the Pareto Chart is the 80% cut-off line. And this line assists frequency in the determination of the 80/20 rule or the Pareto Principle. The cumulative percent data points that fall under the 80% line indicate the category is known as the vital few. The data points above the 80% line indicate the trivial many categories. So the vital few are the priority areas that need to be addressed in order to make a major improvement. And the vital few are the causes that are contributing to 80% of the problem. The trivial many causes are only contributing to 20% of the problem. So if they are reduced or eliminated, they’re not going to make a huge impact on minimizing the overall problem. However, some of the trivial many may be low-hanging fruit or easy to reduce or eliminate, and some may be high risks and need to be addressed as a priority.

What Is the Pareto Principle?

The Pareto Principle is named after the economist Vilfredo Pareto, who specifies that 80% of consequences (results) come from 20% of the causes (actions). The principle asserts an unequal relationship between outputs and inputs. 

The Pareto Principle is also known as the Pareto Rule and the 80/20 Rule and is a general reminder that the relationship between outputs and inputs is not balanced. When it comes to productivity, the Pareto Principle is based on the idea that 80% of the results we achieve come from 20% of the actions we take.

What Are the Uses of Pareto Chart?

The Pareto Chart is used during the diagnostic phase of any quality improvement project. It also helps to highlight high-priority areas where you need to concentrate your initial improvement efforts to achieve the greatest gain. A Pareto Chart can also be used to bust a myth, for example, in reviewing historical beliefs about what is really causing a problem. It can also indicate areas for deeper investigation. 

The purpose of a Pareto Chart is to separate the most significant aspects of a problem from the trivial ones. Separating the elements of a problem in a Pareto Chart helps teams understand where to direct their improvement efforts. The goal is to reduce the largest bars identified in the chart, as their elimination will do more for the overall improvement than reducing the smaller bars first.

Pareto Charts are widely used in lean manufacturing, healthcare, productivity and business, wealth distribution and economics, software development.

What Is the 80/20 Rule of Pareto Charts?

The 80/20 Rule states that nearly 80% of the effects come from 20% of the causes. The Pareto Charts assist teams in focusing on areas of improvement with the greatest impact. The Pareto Principle is also known as the universal principle of the “vital few and trivial many.” In a Pareto Chart, the cumulative percentage of data that fall under the 80% line indicates the categories known as the vital few (or the 20% of the Rule). The data points above the 80% line indicate the trivial many categories (or the 80% of the Rule). So the vital few are the priority areas that need to be addressed in order to make a major improvement. The vital few are the causes that are contributing to 80% of the problems. Here is how the 80/20 Rule impacts a business. For example, 80% of sales come from 20% of clients or 80% of complaints come from 20% of customers.

What Is the Procedure in Pareto Chart?

Here you can find the steps and procedures in the Pareto Chart.

1. Decide which categories you will use to batch items.

2. Decide the appropriate measurement. The most used measurements are frequency, quantity, cost, and time.

3. Decide the period that the Pareto Chart will cover. 

4. Collect the data and record the category each time. The minimum set of data is 30 entries (sample size). You can also use data that you have already collected.

5. Calculate the measurements for each category.

6. Determine the proper scale for the measurements you have already collected. The maximum value is the largest calculation from step 5. Don’t forget to mark the scale on the left side of the Pareto Chart.

7. Build and label every bar for each category. The bars should be built descending which means starting from the tallest to the smallest bar. The categories with small measurements can be grouped under “others,” if there are many such categories.

8. For each category, calculate the percentage; this is the subtotal for a given category divided by the total for all the categories. Draw a vertical axis on the right and put a label with the respective percentages. Ensure that the left measurement, corresponding to one-half, should be the opposite 50% on the right scale.

9. The last step is to draw and calculate the cumulative sum. Add the subtotals for the first and second categories. Next, place a dot above the second bar displaying that sum. Do the same for the third and fourth categories, and finish the process for all the bars in your Pareto Chart. To that sum, add the subtotal for the third category, and place a dot above the third bar for that new sum. You will have to create the line that shows the total cumulative frequency by connecting the dots from the top of the first bar. The last dot must reach 100 percent on the right of the scale.

How to Create a Pareto Chart in Excel?

Creating a Pareto Chart in Excel is very easy because it has a built-in Pareto Chart type. Everything you need to create a Pareto Chart in Excel is a list of categories in one column and their frequency (count) in another column. Here are the steps you need to take to create a Pareto Chart in Excel.

  1. Select your data set (the table in Excel). Usually, you will select a column containing categories and one containing numbers (frequency). The Pareto Chart groups the same categories and calculates their numbers.
  2. Locate the Insert tab in the top menu and click on Insert. Choose Insert Statistic Chart, and then under the Histogram option, choose Pareto Chart.
  3. Configure the bins by right-clicking on the chart horizontal axis. From the Format Axis menu, select Axis Options.
  4. Pick and adjust the options as you wish in the Format Axis task pane. The options you will see are: By Category, Automatic, Bin width, Number of bins, Overflow bin, and Underflow bin. 

What Are the Examples of Pareto Chart?

There are several practical applications for the 80/20 rule when we use Pareto Charts to display the relation between the causes of problems and their consequences. The Pareto Chart is used in diverse areas such as medicine, quality production control, lean manufacturing, business sales, distribution of wealth in economics, and productivity. Let’s look at some of the most popular applications of the Pareto Chart with practical examples.

  • 20% of employees do 80% of work.
  • 20% of your activities will account for 80% of your results.
  • 80% of sales result from 20% of clients.
  • 20% of the marketing efforts represent 80% of the results.
  • 20% of posts generate 80% of traffic.
  • 80% of the quality failures originate from 20% of the tasks.
  • 20% of software development efforts account for 80% of the program’s functionality.
  • The first 20% of the effort put in on a project yields 80% of the project’s results.
  • 80% of your time must be focused on the 20% of the business yielding the greatest results.
  • 80% of the logic of a program is run using 20% of the classes or code.

What Is the Pareto Chart Maker?

The Pareto Chart maker is a graphical tool that creates a Pareto Chart based on the data you provide. What you need to do is to fill in the fields with the frequency data you have already collected and put the names of the categories. The tool will create a Pareto chart based on the data you have entered. With the help of a Pareto Chart maker, you can quickly create beautiful Pareto Charts by using the already available Pareto Chart templates. You can easily customize every aspect of your Pareto Chart – colors, fonts, labels, size, legend. The examples of Pareto Chart Makers are MathCracker and Visual Paradigm Online. Also, there are platforms that provide Pareto Chart templates, such as Praxie.

How to Use a Pareto Chart in Six Sigma?

Lean Six Sigma represents a methodology for overall organizational culture change. At its core, it is a process improvement approach for eliminating inefficiencies and improving work processes by identifying the defects’ root causes. Lean Six Sigma is the smart combination of the Lean methodology focused on removing waste and optimizing flow, while the Six Sigma method seeks to identify and remove issues causes.

The Six Sigma methodology includes the usage of a Pareto Chart to find out the errors and their solutions, so the responsible teams can effectively reduce and eliminate them. The Pareto Chart is used in Lean Six Sigma as a guide, where project teams can identify which problems to resolve first, starting with the ones that impact customers and profitability first. The Pareto Principle states that most of the problems in the process have just a few causes. And the Six Sigma approach to creating a Pareto chart supports this principle by illustrating what these causes are and the scale of impact they have on the process.

Can Pareto Chart be Used in Lean?

Yes, the Lean methodology is continuously improving work processes, purposes, and business-related people. Lean management and Pareto charts are connected to each other. The connection of Pareto Chart and Lean are X, Y and Z. Lean Management encourages shared responsibility and shared leadership instead of holding total control of work processes and keeping the spotlight. The Lean methodology relies on three very simple ideas which are eliminating waste, delivering value from your customer’s perspective, and continuous improvement.

The best method to connect Pareto Chart and Lean Manufacturing is Lean Six Sigma. The Pareto Chart is used in Lean Manufacturing and especially in Lean Six Sigma. In Lean, the Pareto chart is mostly used to compare and detect defects within manufacturing lines and operations. When a given defect is detected, teams can focus on the defect and analyze its occurrence. Manufacturing lines and operations are then stabilized by taking measures to eliminate the future occurrence of the defect.

Is Pareto a Lean Tool?

Yes, Pareto is a lean tool. The Pareto chart is used in lean manufacturing to analyze the relationship between the causes and effects of problems in products and processes. Pareto is also applied in Lean Six Sigma, where the end graph is called a Pareto Chart. 

What Is the Difference Between Pareto Charts and Bar Charts?
The bar graph represents the frequencies between categories of a nominal or ordinal level variable. The Pareto Chart represents the frequency of occurrence of a specific event, displaying events by order of impact from the highest to the lowest. The Pareto chart is a special type of bar chart. However, for a bar chart, the ordering isn’t strictly from high to low, whereas for a Pareto chart, the bars are ordered from the highest to lowest. Bar charts often use some other logical order, such as alphabetical.

For example, you can use a bar chart to display the percentage of the people who have voted in each city/state in a country, ordered in alphabetical order. You can use a Pareto Chart to display the problems that cause people not to vote in a given country, ordered by their impact on the voters’ decision.

What Is the Difference Between a Histogram and a Pareto Chart?

A histogram is a bar graph illustrating the frequency of an event that occurs and uses the height of the bar as an indicator. Each bar in a histogram represents the frequency of occurrence of a specific event. A Pareto chart is similar to a histogram, with the difference that the bins are organized from the highest frequency to the lowest. The Pareto chart contains a line that shows the total cumulative frequency. It represents the Pareto principle, known as the 80/20 rule. The Pareto Chart displays events by order of impact.

Histograms and Pareto charts are both bar graphs that display the frequency of occurrence of a specific event. However, while each bar in a histogram corresponds to the frequency of occurrence of a specific event, the bins in a Pareto Chart are organized from highest to lowest, displaying events by order of impact. Also, a Pareto chart contains a line that shows the total cumulative frequency.

For example, to represent the number of executives whose earnings are between a certain range, such as from 100 to 150K, 155 to 205K, you will use a histogram. Suppose you want to analyze the causes of medical errors in clinical trials. In that case, you will use a Pareto Chart where the causes will be ordered by the frequency of occurrence so that the responsible team can focus on the problems with the biggest impact on the medical errors in the clinical trials.

What Is the History of Pareto Chart?

The Pareto Chart is named after the Pareto Principle or the 80/20 rule, which was developed by Joseph Juran. And he named the rule after the Italian economist Vilfredo Pareto. In 1800 Vilfredo Pareto found that 80% of the land in Italy was owned by 20% of the population. And he was also a very keen gardener. He found that 80% of the high-quality peas were found in the 20% of the pea pods.

Joseph Juran described the rule as the vital few and trivial many since he used to weed out the less important factors in decision-making. So how is this relevant in quality improvement? Basically, Joseph Juran found that 20% of the causes contribute to 80% of the problem. And for many events, roughly 80% of the effects come from 20% of the causes. And a rule of thumb in business is that 80% of complaints come from 20% of customers, and 80% of sales come from 20% of clients.

In 2006, Leland Wilkinson, a statistician and computer scientist, created an algorithm for producing statistically based acceptance limits for each bar in the Pareto chart. The charts can be generated by a simple spreadsheet program such as Excel, online quality charts generators, and specialized statistical software tools. Today, the Pareto chart is one of the seven tools used in quality control.

In Summary

The Pareto Chart is based on the principle of the 80-20 rule which states that 80% of the effects come from 20% of causes. 

  • Pareto Charts help teams to focus on the most impactful areas of improvement
  • Pareto Charts indicate areas requiring deeper research and analysis
  • Pareto Charts help to distinguish between trivial and significant aspects of an event

 

 

 

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