pareto diagram

In today’s blog post, we will discuss the Pareto chart, which is one of the most useful tools in quality management and one of the seven basic quality tools. The other tools are the flowchart, check sheet, cause-and-effect diagram (Ishikawa diagram), control chart, histogram, and scatter diagram.

The Pareto chart is about efficiency. It is about doing less for more! It is a tool that enables prioritization and focuses on the critical few.

Let’s get started.

Pareto Chart

Time and resources are common constraints in every project, and project managers have to prioritize resource utilization for maximum efficiency. They face many issues on projects and cannot devote resources to solve all issues. They have to find the most significant or frequent issues that can be solved with the minimum resources to get the best result.

A Pareto chart helps them achieve this objective.

The Pareto chart is based on the Pareto principle and is also known as the 80/20 rule. 

It was Italian economist Vilfredo Pareto who observed the 80/20 phenomena while working at the University of Lausanne in 1896. He noticed that 80% of Italy’s land was owned by 20% of the population.

Later, management guru Joseph M. Juran refined the concept and named it after Mr. Vilfredo Pareto as “the Pareto principle”.

The Pareto principle states that 80% of the problems are due to 20% of the root causes. Keep in mind that this is a general rule, and the ratio is not absolute.

The Pareto principle is very helpful in project management.

A Pareto chart is a histogram that divides discrete observations into several categories to identify the “vital few.” The phrase “vital few” is used to describe the elements that have the maximum impact on the solution. 

Project managers are constrained by budget and by time and cannot always attend to all issues, hence they need to prioritize which issues to focus on, so they can solve the issues that require less effort but provide maximum results. A Pareto chart is like a prioritization tool. 

In risk assessment, a similar tool that does the risk prioritization is the Probability and Impact Risk Matrix. Low impact risks are kept on the watch list and high priority risks are managed on a priority basis. In the same way, prioritizing root causes for 20% of the risks produces an 80% impact.

This chart (source: Wikipedia) has a vertical bar and sometimes a line graph. The vertical bar represents the frequency of defects, and the line represents a cumulative percentage of the defects.

The bars’ height descends from left to right. The first bar on the left side is the highest, and the last bar on the right is the lowest.

A Pareto chart is a key tool in quality management and Six Sigma. The vertical bar shows problems or opportunities in a prioritized order. The categories include mutually exclusive items arranged in decreasing order. This chart segregates the problems, and then you can find their root causes. 

Afterward, you can invest your effort in those causes and solve most of the problems.

How to Determine the Root Cause

Root causes of a problem can be identified using any of the following: by brainstorming, fishbone diagram, or asking the 5 Whys. We will briefly review the 5 Whys approach to a root cause. 

Example: A colleague came late to work

S/NProblem questionResponseCause no
1Why did you come late?I woke up latecause #1
2Why did you wake up late?I slept latecause #2
3Why did you sleep late?I saw a movie late at nightcause #3
4Why did you see a movie late at night?I needed to return the movie the following daycause #4
5Why did you have to return the movie the following day?I borrowed it from a video clubcause #5 (root cause)

The fifth ‘why’ brings you to the root cause. Cause #5 is the root cause that must be addressed for a lasting solution instead of causes #1-#4.

Likewise, you repeat the 5 Whys to determine root causes for other problems. 

This gives you a list of root causes of a complex problem or system.

The next task will be to prioritize these root causes using the 80/20 principle.

The Theory Behind the 80/20 Rule

The Pareto Principle follows a power law where the probability of measuring a value varies inversely as the power of that value. In most cases, the distribution peaks at a particular value. The significant items in a distribution usually represent a relatively small portion of the total items in the distribution. 

The figure below shows the height of males measured in centimeters between 1959 and 1962 in the US. The distribution shows lower and upper values and a peak value. Most men measured at the peak of 180 cm. This distribution, where most data points fall around a peak value, obeys the power law.

The above figure displays the average speed of cars on UK motorways, which is around 75 mph. This observation is also seen in natural phenomena such as earthquake distribution around the globe. The trend of the power law is independent of location. As a result, you can take the above phenomena into your environment and observe the distribution. 

This was what Vilfredo Pareto, an Italian economist, observed concerning income/wealth distribution, where he observed that 80% of the wealth in Italy was attributed to 20% of the entire population. The peak is at 20% of the population in his distribution, as shown below.

Source: Wikipedia, picture by Hay Kranen

An example power-law graph that shows the ranking of popularity. To the right is the long tail, and to the left are the few that dominate (also known as the 80–20 rule).

Pareto charts are therefore scientific. The above power-law graph shows that the vast majority is at the far left, where the peak is. Thus faced with limited resources, a project manager can start with the 20% that produces the 80% result.

A Few Real-World Pareto Chart Examples

To a sales agent: “The majority of sales come from a handful of customers, so your job is to maximize the critical few.”

To a healthcare provider: “20% of patients use 80% of healthcare resources.”

In product backlog prioritization, we focus on a small percentage of the work that produces a large amount of value. Value maximization is our goal. 

Critical customers in a sales distribution that brings the highest revenue.

Critical staff in an organization that delivers 80% of the result.

Critical departments or business units produce a large part of the result. This also explains why executives focus on 20% of SBUs that contribute 80% of the bottom line.

Resources are not infinite; hence you need to prioritize critical tasks for greater gain.

Focusing on the “vital few” means resource optimization. Solutions to these “vital few” are deployed, enabling a decision-maker or problem solver to differentiate between the critical few and the trivial many.

Pareto Chart’s Application in Quality Control

The quality control process monitors and ensures project outputs meet quality expectations. We will take a case study of spacecraft manufacture. Assuming regulatory manufacturing standards have been adhered to (Quality Assurance), we will study defects in the printed circuit board of the spacecraft.

S/NType of defectDistribution (%)
1.Soldering28
2.Wiring10
3.Board weave12
4.Documentation15
5.Component22
6.Other 7
7.Bonding6
Defect by type

Pareto chart for the distribution is shown below: 

The top three defect causes are soldering, component, and documentation, which accounts for 80% of all defects, as shown by the Pareto line running across the chart.

Now you have to recommend corrective action.

Set up a working group to investigate the soldering, component, and documentation processes with a view to finding root causes of the problems and suggested corrective actions.

S/NFocus problem areas (high priority)Corrective actions
1Soldering defectsReview operating/work procedures and drawings-upgrade tools and equipment
2ComponentUse of visual aids to show acceptable and unacceptable features
3DocumentationAdditional training of operators

Application of Pareto Chart in Agile 

In Agile, we execute tasks that deliver business value early. Value comes before the scope in Agile. Recall the Agile manifesto says that our highest priority is to satisfy customers through early and continuous delivery of valuable software.

A product owner is responsible for working with stakeholders to identify work to be done and prioritize the backlog. One tool for prioritizing is the Pareto chart. This work ranges from user stories, defects to be fixed, learning for self-organized teams, technical debt., etc. A typical task board below shows several work items which a project manager, or in this case the product owner, has to devise a suitable way of prioritizing.

16 tasks have been prioritized to just 5, which is close to the Pareto ratio of 4:1. The resource will focus on 2 out of 6 business value tasks for optimization. Similarly, for other fixed date tasks, defects and learning will get 1 task each for optimization.

In all, 16 tasks have been prioritized to 5 that yield the greatest impact, thus less resource demand.

Tasks Involving Prioritization in Project Management

Pareto charts help various tasks prioritization, such as:

  • Prioritize team and physical resource allocation.
  • Prioritize product requirements through voting.
  • Prioritized product backlog items (user stories).
  • Prioritize funding for projects.
  • Prioritization of individual project risks.
  • Prioritizing stakeholders for projects with many stakeholders.

Focusing on the important things, including:

  • Continuously prioritizing work by reviewing and adjusting as necessary.
  • Finding and using a prioritization method that works best for the project.
  • Differentiating high-level strategic priorities, especially those related to critical success factors for the project.

How to Draw a Pareto Chart

The steps to drawing a Pareto Chart are:

  • Select the categories of causes into which you want to group the issues.
  • Determine the measure; for example, frequency, cost, time, etc.
  • Decide the period to collect the data; for example, one cycle, one day, or one week.
  • Collect the data.
  • Segregate the data as per the categories.
  • Draw a bar chart with causes on the x-axis and the number of occurrences on the y-axis.
  • Draw the bar with the highest number of occurrences at the far left and label the category. 
  • Repeat the procedure until you complete all identified categories.
  • The bar showing the lowest number of problems will be on the far right.

Your Pareto Chart is ready, and now can you draw a cumulative sum line. The procedure to draw this line is:

  • Find the percentage of each category.
  • Add the percentage of the first and second bar and put a dot on the second bar.
  • Add the percentage of the third bar and place a dot at the top of the third bar.
  • Continue the process until all bars are covered.
  • Connect the dots.
  • Now, the cumulative sum line is drawn. Make sure the bar at the far right has a percentage of 100%.

How to Draw Pareto Chart Using Microsoft Excel

  1. Select the data including the title row
  2. Click on Insert on the title bar
  3. On the chart panel, click Insert Statistics Chart
  4. You will find Histogram and Pareto, select Pareto

To draw the Pareto chart, you collect the problems in your process and categorize them by their type and draw a bar chart as per their category. The most frequently occurring problems will be on the left and the least on the right side.

Now that you have segregated the causes generating the majority of the problems, you can analyze them, find the solutions for their root causes, and remove the problems from your process.

Use of a Pareto Chart

Apart from quality management, you can use this tool in the following situations:

  • When you have a lot of data and you want to analyze it.
  • When you want to identify the cause with the highest number of problems.
  • When communicating data with stakeholders.
  • When you want to prioritize tasks.
  • When you want to see the relative importance of data.

Benefits of a Pareto Chart

The following are a few benefits of Pareto analysis:

  • Drawing a Pareto chart is easy.
  • It helps you segregate the problems and their causes.
  • It helps you focus on solving the few issues generating the most problems.
  • It shows you the problems to focus on getting the most significant improvement.
  • It helps you visualize problems, so it is an excellent visual communication tool.

Limitations of a Pareto Chart

The following are a few limitations of Pareto analysis:

  • The Pareto principle is a rule of thumb that you cannot apply in all cases.
  • It does not help you find the root cause of the problem, so you will need another tool such as root cause analysis.
  • If there are many problems, you may need more sub-Pareto charts to segregate, which sometimes may be cumbersome.
  • It shows the frequency of a problem, not the severity.
  • It focuses on past data which might not be significant to current or future scenarios.

It can be challenging for you to understand the major problems and their causes. You might spend your time on solving problems that have less influence on the project.

In such situations, the Pareto chart can help solve problems. It can help you segregate the defects and their causes. Once you get this info, you can focus on the causes generating the most issues.

This is an important tool in quality management, and project managers use it to find the problems with the biggest influence.

Conclusion

A Pareto chart is a useful tool in quality management and one of the important elements of the seven basic quality tools. This chart helps project managers find the minor causes that are affecting the project significantly. It helps project managers prioritize the work of minority causes that affect the project objective most. Being a bar chart variant, it is simple to draw, use, and communicate problems to stakeholders.

How is the Pareto Chart useful in your project? Please share your experiences in the comments section.

This topic is vital from a PMP exam point of view. You will see it on your exam on this topic.