Do Paretos REALLY work?

Posted on 3 Nov 2008 by The Manufacturer

A Pareto chart can help you determine what comprises the “vital few” and which are the “trivial many". Rob Thompson provides an overview on how to use this tool

The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity), states that 80% of the impact is generated by 20% of the causes or actions. This is clearly a very powerful rule, and it does apply to most aspects of life.

> In work, 20% of the tasks are going to consume 80% of your time.

> In social life, you spend 80% of your time with 20% of your friends and family group.

Of course, 80/20 is just nice general rule of thumb to use, but the principle is always valid:

“A small portion of just about anything will most likely represent the majority of the total impact.”

Pareto charts

Pareto charts are a type of bar chart in which the horizontal axis represents categories of interest, rather than a continuous scale. By ordering the bars from largest to smallest, a Pareto chart can help you determine which of the defects comprise the “vital few” and which are the “trivial many.” A cumulative percentage line helps you judge the added contribution of each category. Pareto charts can help to focus improvement efforts on areas where the largest gains can be made.

The benefits:
> Simple, easy to use.
> Highly visible.
> Ranks items, left to right.
> Helps to focus on key areas.

The cautions:
> Does not display criticality or assign risk to each category.

When to Use:
> When analyzing data about the frequency of problems or causes in a process.
> When there are many problems or causes and you want to focus on the most significant.
> When analyzing broad causes by looking at their specific components.
> When communicating with others about the data.

Click here for an example of a Parento chart

The steps:
1) Clarify the purpose of the data collection survey.
2) Determine classification of items.
3) Determine a meaningful unit of measure.
4) Gather data. Calculate cumulative totals and ratios.
5) Draw vertical and horizontal axes. Enter items in descending order and draw bar graph. Add frequency scale on left.
6) Draw the broken line graph for the ratios in each category. Draw a vertical axis on the right to 100%.
7) Enter the necessary chart information (title, labels, etc.).

Personally, I don’t think that this notion of 80/20 really truly applies to very many situations. However, as soon as people are presented with this convenient idea, they start perceiving reality accordingly.

While there are differences in performance between individuals and groups over time, it’s not really 80% of the results that are produced by 20% of the employees. For example, if that was the case, why isn’t performance rewards and incentives divided along the same way instead of the otherwise popular ideology of using the normal distribution?

Do these groups that we measure not have to be representative of the population for this notion to work?

Nor is 80% of the wealth owned by 20% of the people.

It’s a lot more uneven.

80% is owned by a much smaller group of people – but again it depends on how you measure it. Globally or in some homogeneous middle-class western-hemisphere neighborhood or by country? Is it by nominal income exchanged to USD or by purchasing power? Does it compensate for the enormous differences in real-estate price and value?

Nor is it 20% of the effort that creates 80% of the functionality of a new IT system. But when you think along those lines, you adjust your assessment and evaluation of a % accordingly so that it may fit. The reality is that the complex or contentious functionality simply takes longer to develop. How do you weigh simple functionality vs. complex functionality? If you have this rule in mind, you will make it fit 80/20 split.

Certainly, it’s always good to keep in mind how to most effectively spend your time and expend more effort on the most valuable activities and this 80/20 idea can be useful in reminding us about it. But beyond that, it’s a rather superficial assertion about a very complex reality that does require a lot more empirical backing to really be worthy of it’s “rule” status I believe.

There is an inherent danger of bias and prejudice when assuming that new contexts conform to this 80/20 idea. It can severely inhibit our ability to see complexities and when you think about it, what more do you need to get out of this than being reminded to use your time and efforts where it’s most valuable (no matter what standard you hold the word “valuable” to?).

By Rob Thompson of LearnSigma blog.

Have you heard any experience of using Pareto charts? Do they work? Is there a smilar method which is better? Leave a comment below or email [email protected].