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# 8.2.1 PARETO ANALYSIS

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The Italian economist Vilfredo Pareto (1848–1923), established a theory for

the purpose of evaluating the sources of a society’s wealth. His thesis was later

confirmed by Juran, and the Pareto Principle was established as: ‘‘Not all of the

causes of a particular phenomenon occur with the same frequency or with the

same impact.’’

Pareto analysis is used to get a quick assessment of the most important factors

involved in the data you are assessing.

To perform a Pareto analysis, you must first list all the issues. Next, you

must determine the number of occurrences or the amount of deviation or apply

whatever metric you use to determine ‘‘goodness’’ or ‘‘badness.’’ Once you have

achieved this evaluation, it is recommended that you create a bar chart. As the

issues begin to unfold, you will see the relative sizes of the bars begin to take

shape. The bar chart, similar to Figure 8-1, will give you a relative representation

of the issues.

The next step is to reorder the bars of the chart so that the first bar is the

tallest with the adjacent bar the next tallest and so on until you run out of bars.

Rearranged, the issues now look like Figure 8-2. Clearly Issue 2 and Issue 3

constitute the most number of occurrences. Pareto’s Principle suggests focusing

on identifying these key issues. Interestingly, Jay Arthur1 has created what he

calls his 4–50 rule. His principle suggests that 4 percent of the problems contribute

to 50 percent of the losses. Or 4 percent of the zones contribute 50 percent

F i g u r e 8 - 1 — P a r e t o A n a l y s i s : R a w D a t a

1 2 3 4 5

F i g u r e 8 - 2 — P a r e t o A n a l y s i s : O r d e r e d D a t a

2 3 4 1 5

of the sales, and so on. I would not argue with either thesis. The principles are

clearly the same in suggesting a few of the issues cost you the most money.

Attack those few first to get the biggest ‘‘bang for the buck.’’ Interestingly, the

Arthur modification to Pareto Analysis is quite similar to the Barnes and

Wormer modification of the 85:15 Rule (see paragraph 7.2.1).

Obviously, in order to invoke the 4–50 rule, one would need to have a significant

number of issues to evaluate, certainly more than four.

There are many, many books that contain the Pareto Principle, but most are

sociology books and economics books. The Pareto Principle, Pareto Analysis,

etc., does not warrant a book per se. You will find all the information you need

in articles and short references. If you want more detail, do an Internet search

on Pareto and you will find more detail than you ever wanted.

See Table 8-2 for Pareto Analysis software.

T a b l e 8 - 2 — P a r e t o A n a l y s i s S o f t w a r e

Tool Product Vendor

Pareto Analysis

‘‘PathMaker’’ SkyMark

Following is contact information for the company listed in Table 8-2:

SkyMark

7300 Penn Avenue,

Pittsburgh, PA 15208

Phone: 800-826-7284 or

412-371-0680

Fax: 412-371-0681

Web site: www.skymark.com

E-mail: info@skymark.com