pareto diagram

A Pareto chart is one of the most useful tools in quality management and one of the seven basic quality tools. The various tools include the flowchart, check sheet, cause-and-effect diagram (Ishikawa diagram), control chart, histogram, and scatter diagram.

The Pareto chart is a visual representation of grouped errors in descending order. It’s all about doing less and getting more! It allows us to prioritize and concentrate on a few key issues that impact the project most. 

Pareto Chart

Project managers cannot devote all resources to resolving all the issues that arise during a project. It is simply inefficient and not practical.

They must identify issues that arise frequently and can be resolved with minimal resources while delivering the best possible outcome.

The Pareto analysis aids them in achieving this goal.

The Pareto principle, commonly known as the 80/20 rule, is the foundation of the Pareto chart.

While working at the University of Lausanne in 1896, Italian economist Vilfredo Pareto observed that 80% of the land is owned by 20% of the population in Italy. He coined the phrase “the 80/20 principle” to describe this phenomenon.

Later, management guru Joseph M. Juran improved the notion and dubbed it “the Pareto Principle” after Mr. Vilfredo Pareto.

Definition: The Pareto principle states that 80% of problems are due to 20% of root causes.

Understand that the Pareto Principle is a general rule, not an absolute ratio.

The “vital few” are identified using a Pareto chart, which is a histogram that categorizes random observations. These “vital few” components have the most impact on the outcome.

Project managers have limited time, and this tool assists them in prioritizing issues to focus on, allowing them to tackle the issues that require the least effort while still yielding the best outcomes. A Pareto chart functions similarly to a priority chart.

The risk assessment matrix is another tool in risk management that helps us prioritize risks using their probabilities of occurring and the impact. We can keep low-ranking risks on the watch list to focus on high-ranking risks.

Developing risk responses for the top 20% of the risks produces an 80% impact.

pareto chart

This chart 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 height of the bars 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.

The vertical bar shows issues in a prioritized descending order. The issues in all categories are mutually independent. After segregating the problem, we can find the root cause for the top 20% of the issues and focus on solving them to get an 80% impact.

How to Determine the Root Cause

We can identify the root causes of a problem using brainstorming, a fishbone diagram, 5 Whys techniques, etc. 

I will briefly explain the 5 Whys approach to a root cause. 

Example: A colleague came late to work.

Let’s ask why he came late.

how to determine root cause for pareto chart

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

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

This gives us a list of the root causes of problems. Afterward, we can prioritize these root causes using the 80/20 principle.

The Theory Behind the Pareto Analysis

The Pareto Principle is based on a power law, which states that the likelihood of measuring a value varies inversely with the value’s power. The distribution usually peaks at a specific value. In most cases, the noteworthy items in the distribution make up a small percentage of the overall items in the distribution.

Between 1959 and 1962, the height of males in the United States was measured in cm. Lower and upper values, as well as a peak value, are shown in the distribution. The power law governs this distribution, with the majority of data points falling around a peak value. The majority of men were 180 cm tall at their apex.

theory behind 80 20 rule

The average speed of cars on UK motorways, which is roughly 75 mph, is depicted in the second graph in the above picture.

This is also observed in natural occurrences like earthquakes all around the world. The power law’s trend is unaffected by location.

We can also observe the spread of the above phenomena in your area.

Similarly, Pareto observed that 80 percent of Italy’s wealth was attributable to only 20 percent of the population. In his distribution, the peak is at 20% of the population, as seen below.

80 20 rule
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).

The vast majority of people are toward the extreme left, where the peak is, as shown in the power-law graph above. When working with limited resources, a project manager can start with the 20% that yields an 80% result.

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 20% of the work that produces 80% 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 business units produce a large part of the result. This explains why executives focus on 20% of SBUs contributing 80% of the bottom line.
  • Resources are not infinite; hence we need to prioritize critical tasks for greater gain. Focusing on the “vital few” means resource optimization.

Pareto Chart’s Application in Quality Control

The quality control process guarantees that project deliverables fulfill quality standards.

We’ll look at a case of spacecraft production. We will examine faults in the spacecraft’s printed circuit board to see if regulatory manufacturing standards are met.

Pareto Charts Application in Quality Control

Pareto chart for the distribution is shown below:

pareto chart distribution

As indicated by the Pareto line going across the chart, the top three flaws are soldering, component, and documentation, which account for 80% of all defects.

Now we must make recommendations for corrective action.

Investigate the soldering, component, and documentation processes, find the root causes of the problems and suggest corrective actions.

Pareto chart table data for the distribution

Application of Pareto Chart in Agile 

We perform activities that create business value early in Agile. In Agile, value comes before scope.

According to the Agile manifesto, our top aim is to satisfy customers by delivering valuable software early and often.

A product owner collaborates with stakeholders to prioritize the backlog and identify work. The Pareto chart is used to prioritize the backlog. User stories, defects to be fixed, learning for self-organized teams, technical debt, and so on are all part of this effort.

The product owner must prioritize the backlog, which is depicted on the task board below.

pareto task board

Sixteen tasks have been prioritized to 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.

All 16 tasks have been prioritized to 5 that yield the greatest impact.

Tasks Requiring Prioritization

Pareto charts help in 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 draw a Pareto chart are:

  • Select the categories of causes 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 and group it into 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 we complete all categories.
  • The bar showing the lowest number of problems will be on the far right.

The Pareto chart is ready, and now we can 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. We will find Histogram and Pareto, select Pareto

To create a Pareto chart, collect the problems in your process, classify them by type, then create a bar chart for each category. The left side will have the most problems, while the right side will have the least.

We can now examine the factors that are causing the bulk of the difficulties, develop solutions for their core causes, and eliminate the issues from your process.

Use of a Pareto Chart

We can use this tool in the following situations:

  • When we want to analyze a large amount of data.
  • When we want to identify the cause of frequently occurring issues.
  • When communicating data with stakeholders.
  • When we want to prioritize tasks.
  • When we 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 us segregate the problems and their causes.
  • It helps us focus on solving the few causes generating the most problems.
  • It shows us the problems to focus on getting the most significant improvement.
  • It helps us 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 we cannot apply in all cases.
  • It does not help us find the root cause of the problem; we will need another tool such as root cause analysis.
  • If there are many problems, we may need more sub-Pareto charts to segregate, which can sometimes 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 us to understand the major problems and their causes. We might also spend resources on solving problems that have less influence on the project.

Conclusion

This is an important tool in quality management and Six Sigma. Project managers use it to find the problems with the biggest influence. This chart helps project managers find the minor causes 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.