The Pareto diagram allows to determine irregularities of an organization, identify its points of improvement and define which action plan is essential to attack its losses.
Do you want to know more about the Pareto chart, the advantages of applying it and how to make one? Continue reading!
What is the Pareto chart?
The Pareto chart is a graph that organizes values, which are separated by bars and organized from highest to lowest, from left to right respectively.
This graph allows assigning an order of priorities for decision making of an organization and determine which are the most serious problems that must be solved first.
Its purpose is to make visible the real problems that are affecting the achievement of the company’s objectives and reduce its losses.
In addition, it allows us to previously evaluate what the needs of the target audience are and how to satisfy them with our product or service, also achieving the marketing objective.
How did the Pareto chart come about?
It was first enunciated by the Italian engineer, sociologist, economist and philosopher Vilfredo Pareto (1848-1923).
Through his study on the division of wealth in Italy at that time, he concluded that 80% of wealth was in the hands of the 20% of the population and the other 20% of wealth was in the remaining 80%.
Determining this, he first published it in 1896 in his “Cours d’économie politique”.
How does the Pareto principle work?
Represents the 80/20 rulethat is, in most situations, 80% of the consequences are due to 20% of the actions or 80% of the defects of a product are due to 20% of the causes.
In other words, we can say that, although many factors contribute to a cause, few are responsible for said result.
Although the relationship is not always exact, the Pareto principle is usually fulfilled and is the basis of this diagram.
What are the elements of the Pareto chart?
The Pareto diagram is made up of a structure divided into three parts:
- The left “Y” axis is the frequency of the problem occurrence.
- The “Y” axis on the right is the cumulative percentage of the total number of occurrences.
- The lower part of the “X” axis shows the problems, complaints, defects or waste that were presented.
What are the advantages of using the Pareto chart?
By allowing us to focus on what really affects the company, the Pareto chart achieves:
- that the company continuously improve;
- problem analysis and prioritization;
- optimize effort and time by focusing on aspects whose improvement will have a direct impact;
- provide a simple and complete view of the problems;
- make the graph easy to understand;
- stimulate the work team in the search for continuous improvement;
- in advance, check what is the best automation tool to use or buy for our marketing strategy.
In addition, the Pareto diagram allows comparing the diagrams of the same problem at different times, thus being able to determine if there were improvements, changes and positive effects on said problems.
In what areas can it be applied in a company?
The Pareto chart can be applied in all areas of the company in a similar way. Next, we will show you some of them:
20% of a company’s processes generate 80% of its products or services.
80% of the deals closed by the sales force are generated by 20% of the products and 20% of the clients generate 80% of the income.
80% of a company’s success comes from 20% of its employees.
Complaints and suggestions area
20% of product rejections represent 80% of customer complaints.
80% of the inventory cost represents 20% of the products.
20% of defects affect 80% of processes.
How to make a Pareto diagram in an organization?
Next, we will tell you the steps and an example so that you can properly make a Pareto diagram, continue reading!
1. Select which aspect you are going to analyze
It is essential that you determine what is the problem that is causing you losses, be it time, sales, personnel, among others.
2. Group the data
You must divide by cells according to the category and the number of frequency (or occurrence).
The category (or problems) are the most common ones you see on your website.
The frequency that is, out of a given number of customers, which ones complained about which problem.
3. Sort the data
Arrange your table in descending order of frequency and adds the cumulative frequency of cases by adding the previous frequency with the next.
4. Add percentage values
Add another column to add the unit percentage values.
The calculation is determined by the formula: Frequency/total frequency x 100
Example: delivery delay= (20/70) x 100= 29% (approximate).
5. Add the cumulative percentages
Like the accumulated frequency, the previous unit percentage is added to the following one.
6. Construct the Pareto chart
Then, with the data from the previous table, the diagram is outlined, its ordinate axes, the data are inserted (in descending order) and the bars are added.
With the cumulative percentage data, a center point is placed on each bar and then they are joined with a line.
To finish, the graph is analyzed.
To conclude this diagram, data such as date, title, what was studied, corrective measures to be applied are added.
Remember that the Pareto chart allows you to assign an order of priorities, directing your efforts and time to 20% of the causes that manage to solve 80% of the company’s problems.
Because of this, it enables you to be more proactive and effective by focusing on doing the activities that really deliver results.
Do you want to know other tools to analyze and improve the performance of your company? If so, continue your reading and learn about SWOT analysis. It will be very useful to you!