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1.0 PARETO CHART

1.1 INTRODUCTION
The Pareto Chart is named after Vilfredo Pareto, a 19
th
century economist who postulated that
a large share of wealth is owned by a small percentage of the population. This basic principle
translates well into quality problems. A Pareto Chart is a series of bars whose heights reflect
the frequency or impact of problems. The bars are arranged in descending order of height
from left to right. This means the categories represented by the tall bars on the left are
relatively more significant then those on the right. This bar chart is used to separate the vital
few from the trivial many. These charts are based on the Pareto Principle which states that
80 percent of the problems come from 20 percent of the causes. Pareto charts are extremely
useful because they can be used to identify those factors that have the greatest cumulative
effect on the system, and thus screen out the less significant factors in an analysis. Ideally, this
allows the user to focus attention on a few important factors in a process.

1.2 OBJECTIVE
Pareto Chart Used
You can think of the benefits of using a Pareto Charts in economic terms. A
Pareto Chart breaks a big problem down into smaller pieces, identifies the most
significant factors, shows where to focus efforts, and allows better use of limited
resources. You can separate the few major problems from the many possible problems
so you can focus your improvement efforts, arrange data according to priority or
importance, and determine which problems are most important using data, not
perception.
A Pareto Chart can answer the following questions:
What are the largest issues facing our team or business?
What 20% of sources are causing 80% of the problems?
Where should we focus our efforts to achieve the greatest
improvements?

A Pareto Chart is a good tool to use when the process you are investigating produces
data that are broken down into categories and you can count the number of times each
category occurs. A Pareto diagram puts data in a hierarchical order, which allows the
most significant problems to be corrected first. The Pareto analysis technique is used
primarily to identify and evaluate nonconformities, although it can summarize all
types of data. It is the perhaps the diagram most often used in management
presentations.

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Making problem solving decisions isnt the only use of the Pareto Principle. Since
Pareto Charts convey information in a way that enables you to see clearly the choices
that should be made, they can be used to set priorities for many practical applications.
Some examples are:
Process improvement efforts for increased unit readiness
Skills you want your division to have
Customer needs
Suppliers
Investment opportunities

1.3 HOW TO CONSTRUCT & USE PARETO GRAPH WITH EXAMPLE DATA
AND GRAPH
1. Determine the categories of problems or causes to becompared. Begin by organizing
the problems or causes into a narrowed downlist of categories (usually 8 or less).
2. Select a Standard Unit of Measurement and the Time Periodto be studied. It could be a
measure of how often something occurs (defects,errors, tardies, cost overruns, etc.);
frequencies of reasons cited insurveys as the cause of a certain problem; or a specific
measurement ofvolume or size. The time period to be studied should be a reasonable
lengthof time to collect the data.
3. Collect and Summarize the Data. Create a three-columntable with the headings of
"error or problem category", "frequency",and "percent of total". In the "error or
problem category"column list the categories of problems or causes previously
identified.In the "frequency" column write in the totals for each of thecategories over
the designated period of time. In the "percent oftotal" column, divide each number in
the "frequency" columnby the total number of measurements. This will provide the
percentage ofthe total.
Error Category Frequency Percent of Total
Punctuation 22 44%
Grammar 15 30%
Spelling 10 20%
Typing 3 6%
TOTAL 50 100%

4. Create the framework for the horizontal and verticalaxes of the Pareto Chart. The
horizontal axis will be the categories ofproblems or causes in descending order with
the most frequently occurringcategory on the far left (or at the beginning of the
horizontal line).There will be two vertical axes-one on the far left and one on the
farright. The vertical axis on the far left point will indicate the frequencyfor each of
the categories. Scale it so the value at the top of the axisis slightly higher than the
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highest frequency number. The vertical axison the far right will represent the
percentage scale and should be scaledso that the point for the number of occurrences
on the left matches withthe corresponding percentage on the right.


5. Plot the bars on the Pareto Chart. Using a bar graphformat, draw the corresponding
bars in decreasing height from left to rightusing the frequency scale on the left vertical
axis. To plot the cumulativepercentage line, place a dot above each bar at a height
corresponding tothe scale on the right vertical axis. Then connect these dots from
leftto right, ending with the 100% point at the top of the right vertical axis.


6. Interpret the Pareto Chart. Use common sense-just becausea certain problem occurs
most often doesn't necessarily mean it demandsyour greatest attention. Investigate all
angles to help solve the problems-Whatmakes the biggest difference? What will it cost
to correct the problems?What will it cost if we don't correct this problem?

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To construct a Pareto Chart, you need to start with meaningful data which you have collected
and categorized. You need to segment the range of the data into groups (also called segments
or categories). For example, if your business was investigating the delay associated with
processing credit card applications, you could group the data into the following categories: no
signature, residential address not valid, non-legible handwriting, already a customer, and other
(a category that is inclusive of additional categories with small counts).

Construct A Pareto Chart Manually Or With Excel. Both Options Are
Listed Below.
The following steps describe how to construct a Pareto Chart manually:
Step 1 Record the raw data. List each category (i.e., no signature, residential address not
valid, non-legible handwriting, already a customer, and other) and its associated
data count (how many times each category occurred).
Analysis Sheet
Category Frequency
No address 9
Illegible 22
Current customer 15
No signature 40
Other 8

Step 2 Order the data. Prepare an analysis sheet, putting the categories in order by placing
the one the largest count first.
Analysis Sheet Category Frequency
No signature 40
Illegible 22
Current customer 15
No address 9
Other 8

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Step 3 Label the left-hand vertical axis. This is where the count of each category will
appear. Make sure the labels are spaced in equal intervals from 0 to a round number
equal to or just larger than the total of all counts. Provide a caption to describe the
unit of measurement being used, in this case we will label the left-hand vertical axis
Frequency.
Step 4 Label the horizontal axis. This where your different categories will appear. Make
the widths of all the bars the same and label the categories from largest to smallest.
An other category can be used to last to capture several smaller sets of data
Provide a caption to describe them. If the contributor names are long, label the axis
A. B. C, etc. and provide a key. In the case of our example, the bars on the
horizontal axis will be labeled: no signature, illegible, current customer, no address,
and other.
Step 5 Plot a bar for each category. The height of each bar should equal the count for that
category. The widths of the bars should be identical.
Step 6 Determine the percentage that each category represents. To do this, total the counts
(for our example, this would be 94). Next, determine the percentage for each
category (i.e., 40/94 for no signature). It is your choice to determine rounding, but
the total of all percentages added together, should equal 100%.
Analysis Sheet
Category
Frequency Percentage
No signature 40 43%
Illegible 22 23%
Current customer 15 16%
No address 9 10%
Other 8 8%

Step 7 Find the cumulative percentage. Each categorys cumulative percentage is the
percentage for that category added to the percentage of the category of the larger
category before it. (For example: the cumulative percentage for the category of
illegible would be 43+23.)
Analysis Sheet
Category
Frequency Percentage Cumulative
Percentage
No signature 40 43% 43%
Illegible 22 23% 66%
Current customer 15 16% 82%
No address 9 10% 92%
Other 8 8% 100%


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Step 8 Add a cumulative line. This is optional. Label the right axis from 0 to 100% and line
up the 100% with the grand total on the left axis. For each category, put a dot as high
as the cumulative total and in line with the right edge of the categorys bar. Connect
all the dots with a straight lines.
Step 9 Add title, legend (optional), and date (optional). See chart below.



Step 10 Analyze the diagram. Look for a break point on the cumulative percent graph. It can
be identified by a marked change in the slope of the graph. This separates the
significant few from the trivial many.
Note: The significant few-trivial many principle does not always hold. No matter how may
data are categorized, they can be ranked and made into a Pareto diagram. Sometimes, no
single bar is dramatically different from the others, and the Pareto Chart looks flat or gently
sloping. To attack the tall bar in that situation is no help. You need to look for another way to
categorize the data.



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To create a Pareto Chart in Excel: - setup a spreadsheet such that the first column contains
the categories of your data and the second column contains the frequency. All examples in
steps will be for data used in Figure 1:
Step 1 Sort your data in descending order by frequency of occurrence. In order to do
this, select the data you want to sort (highlight category and frequency columns) and
click Data, Sort, and then sort by Frequency (from drop down menu) and select
Descending.
Step 2 At the bottom of the frequency column, total up the number of occurrences
(e.g. =SUM(B2:B6)).
Step 3 Format columns C and D so that percentages will appear when data is entered
into cells for those columns. To do this, highlight columns C and D, click format,
cells, and on number tab, click percentage and change the decimal places to whatever
is appropriate for your use. It is your choice to determine rounding, but the total of all
percentages added together, should equal 100%. For this example, we are going to
round to two (2) decimal places.
Step 4 In the third column, create percentages of each occurrence based on the
frequency (e.g. in cell C2, type =B2/B7, for cell C3, type =B3/B7, etc.) Remember,
the total of the percentages should add up to 100%.
Step 5 Create a fourth column and enter the cumulative percentage (e.g. in cell D2,
type: =C2. In cell D3, type (=D2 + C3), as shown in Figure 1. In cell D4, type (=D3
+C4), etc. The cumulative percentage for the last category should equal 100%. The
cumulative percentage will be used to create your cumulative line on your chart.
Step 6 Use the control key to select noncontiguous columns, highlight the Category,
Percentage and Cumulative Percentage data. In the Figure 1 this corresponds to cells
A1:A6 and C1:D6. You will not include the total of column B when selecting this data.

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FIGURE 1
Step 7 Generate a combination bar chart. To do this, click Insert from toolbar, then
chart, or click the Chart Wizard icon from your toolbar. This will bring up the Chart
Wizard. Select Custom Type and then scroll down to select Line- Column on 2 axis.
You will then click the Next button at the bottom of the Chart Wizard screen. You
have already highlighted your data range in Step 6. Make sure the columns tab for the
Series in button is clicked. Then click next.
Step 8 Add proper titles, labels and axis formats. Then click next. Now you must
decide if you want the chart to be located as an object in the worksheet or if you would
like the chart to appear as a separate worksheet. Once you have selected an option, you
will get a chart that resembles the following:


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Things to look for on your Pareto Chart:
In most cases, two or three categories will tower above the others. These few categories
which account for the bulk of the problem will be the high-impact points on which to focus. If
in doubt, follow these guidelines:
1. Look for a break point in the cumulative percentage line. This point occurs where the slop
of the line begins to flatten out. The factors under the steepest part of the curve are the most
important.
2. If there is not a fairly clear change in the slope of the line, look for the factors that make up
at least 60% of the problem. You can always improve these few, redo the Pareto analysis, and
discover the factors that have risen to the top now that the biggest ones have been improved.
3. If the bars are all similar sizes or more than half of the categories are needed to make up the
needed 60%, try a different breakdown of categories that might be more appropriate.

Points to Remember:
The measurement units can significantly affect your Pareto Chart. You must determine
which factors are the most important. For example, using the chart above, it may change
significantly if you were looking at the factors which cost the company the most money when
examining scrap. For instance, bad material may cost the company more the tool changes
when it comes to the cost of scrap.
It is essential to use the same units of measure and clearly mark these units on the chart.
Make sure the other category (if you chose to have one) doesnt become unreasonably
large. If your other category accounts for more than 25% of your problem, you should
probably try to break it down

1.4 How to Read a Pareto Chart
The Pareto rule, often called the 80/20 rule, is a tool for diagnosing a business
problem. The rule says that a problem has multiple causes, and that 20 percent of the
causes account for 80 percent of the problem. Reading a Pareto chart identifies 20
percent of the causes so that you can correct them and solve 80 percent of your
problem.



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INSTRUCTIONS

1. Read the label along the left side vertical axis, commonly called the y-axis, on a
standard Pareto chart. This data will be listed in units. These units will line up with
descending bars coming from the horizontal axis, commonly called the x-axis.

2. Line up the units of each bar with the left y-axis, which outlines how many times
something occurred. For example, the chart may record the number of times a person
was on hold for more than five minutes while waiting to talk to a customer service
representative. The first bar, which might be labeled "Too few representatives on
staff," would be the largest and line up with the biggest units.

3. Coordinate each bar with the right side y-axis. This will tell you what percent of all the
units that one bar comprises. If the first bar lines up with the 30 percent line, then 30
percent of the instances for your problem happened because of that cause.

4. Follow the upward curving line. This will attach a percentage that lines up with each
bar. These percentages are cumulative. If the first bar accounts for 30 percent and the
second bar accounts for 15 percent, the dot on the line above the second bar will read
45 percent, meaning these two results are causing 45 percent of the problem.

5. Solve your problem by eliminating the set of results that equal 80 percent. For
example, if the first three bars equal approximately 80 percent cumulatively, fix these
causes.

1.5 SUMMARY
Pareto chart is a analysis of statistical technique in decision making that is used for selection
of a limited number of tasks that produce significant overall effect. It uses the Pareto
principle the idea that by doing 20% of work, 80% of the advantage of doing the entire job
can be generated. Or in terms of quality improvement, a large majority of problems (80%) are
produced by a few key causes (20%).Pareto chart analyse is a formal technique useful where
many possible courses of action are competing for attention. In essence, the problem-solver
estimates the benefit delivered by each action, then selects a number of the most effective
actions that deliver a total benefit reasonably close to the maximal possible one.
Pareto analysis is a creative way of looking at causes of problems because it helps stimulate
thinking and organize thoughts. However, it can be limited by its exclusion of possibly
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important problems which may be small initially, but which grow with time. It should be
combined with other analytical tools such as failure mode and effects analysis and fault tree
analysis for example. This technique helps to identify the top 20% of causes that need to be
addressed to resolve the 80% of the problems. Once the top 20% of the causes are identified,
then tools like the Ishikawa diagram or Fish-bone Analysis can be used to identify the root
causes of the problems.The application of the Pareto chart analysis in risk management allows
management to focus on the 20% of the risks that have the most impact on the project.

1.6 REFERENCES & APPENDIX
Read more:
1. How to Read a Pareto Chart | eHow.com http://www.ehow.com/how_8660040_read-pareto-
chart.html#ixzz25J3PbfIx
2. http://betterexplained.com/articles/understanding-the-pareto-principle-the-8020-rule/
3. http://st-div.web.cern.ch/st-div/Groups/di/Quality/ST_Quality/Quality_circle/QA_minutes/QWG-
990617/pareto.html
4. http://en.wikipedia.org/wiki/Pareto_analysis
5. http://www.bia.ca/articles/qm-pareto-charts.htm
6. http://whatis.techtarget.com/definition/Pareto-chart-Pareto-distribution-diagram