Pareto Principle Explained

ThePareto Principal
…. also
Known By
Many Other Names

A ‘GREAT” Management Tool .. With Many Names!
The “Pareto Principle”
“The Law of The Vital Few and the Trivial Many”
The “Power Law”
“Participation Inequality”
The “80 – 20 Rule”
ABC Analysis Technique

Introducing “Alfred PARETO”
In 1879, the famous Italian economist Alfred Pareto, noticed that 80% of Italy’s wealth was controlled by 20% of the population.
This concept is known as “Pareto’s Law” or “Pareto’s Rule” or “Pareto Principle” or “Principle of imbalance” or simply “The 80/20 Rule”.
Subsequently, people in various disciplines and professions noticed that this same 80/20 applied, in a broad way, to a wide range of phenomena. Dr. Joseph Juran also recognized this concept as universal that could be applied to many fields. He coined the term vital few and useful many.

Introducing Dr. Joseph M. Juran
Quality Management pioneer, Dr. Joseph Juran recognized a universal principle he called the "vital few and trivial many".
In an early work, a lack of precision on Juran's part made it appear that he was applying Pareto's observations about economics to a broader body of work.
The name Pareto's Principal stuck, probably because it sounded better than Juran's Principle.
As a result, Dr. Juran's observation of the "vital few and trivial many", the principle that 20 percent of something always are responsible for 80 percent of the results, became known as Pareto's Principle or the 80/20 Rule.
Dr Joseph M. Juran

The Pareto Principle – akaThe 80 – 20 Rule

The Pareto Principle – akaThe 80 – 20 Rule
The
VITAL FEW

Examples Pareto Principle / 80 – 20 Rule
20% of the Code
Has 80% of the Defects.

Examples Pareto Principle / 80 – 20 Rule
20% of the Modules - Consume 80% of the Resources.
20% of the Modules - Consume 80% of the Execution time.
20% of the repairs - Consume 80% of repair costs.
20% of the enhancements - Consume 80% of adaptive maintenance costs.
20% of the tools - Experience 80% of the tool usage.

Examples ofPareto Principle / 80 – 20 Rule
Output
Input
Effect
Cause
Efforts
Products

Pareto Principle Also Applies to Inventory $ & Purchase $
Inventory $
Purchase $
20%
80% $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
80%
20%$$

Pareto Principle Also Applies to Purchases & Suppliers
Purchases
Suppliers

Pareto Principle Also Applies to People
Output
In-Put

Like Roads, Pareto Charts Can Be ……
SIMPLE
OR
COMPLEX

What Makes The Charts “Complex”?
Our initial “Simple” Charts will only involve examination of the “Production of Doors” with only:
6 Manufacturing Defects,
Over a Period of 31 Days.
Now visualize the greater complexity of Charts for;
An Inventory of 30,000 + Stock Keeping Units / Items
Over a Period of 365 days.
When we are comfortable with the “Process” – the “Complex will become Simple”

SO ……
In this Session we will start with simple “Manual” Bar Charts - to learn the “Process” …..
Then ……
In the NEXT Session “ABC Analysis” we will move on to more complex Charts using “MS Excel” to apply the “Process” to large amounts of (Real Life) Data

Variables & Data
Variables and data can be:
Qualitative = the answer isNOT a number; or
Quantitative = the answer IS a number.
REMEMBER - In Exercise 1Chart we will only be examining ONE “Quantitative” VARIABLE – “Frequency”

Back to BasicsThe Pareto Frequency Diagram
The Pareto Frequency Diagram is a bar chart which displays the causes of various defects, in order, from:
The “most frequent” - to
The “least frequent”
so that you can focus attention on the Most Frequent problems (which may or may NOT be the most important – just the most Frequent!.

Pareto Frequency DiagramEXERCISE # 1
Wooden glass doors are produced on a six day work week.
At final checkout before shipping, the doors are inspected and each is classified as conforming or non-conforming and specific Defects are identified for each non-conforming door.
The Next 2 Slides shows details of “Nonconforming doors” or “Door Defects” identified by day and by type of Defect:

“Door Defects” Defined
Day: Day Door is Mfg & Inspected
Window: Window misaligned
Discolor: Discolor
Handle: Handle hole missing
Hinges: Hinges wrong
Rough: Rough wood
Glass: Broken glass
Warped: Warped

Defects Detected Per Day!

Bar Chart of Defects by DayCan You Identify The Problem Area?
Can You See A Pattern?
Nor can I (yet)!

Pareto Frequency Chart EXERCISE # 1
Using the Data from the “Defects Detected By Day” Slide and the Blank “Graph” in your Notes, make up a Pareto “Frequency” Chart (a Bar Chart Format) with the:
Highest Frequency / Tallest Bar on the Left, &
Lowest Frequency / Shortest Bar on the Right.

Exercise # 1Mfg Fault Frequency Chart

Exercise # 1Mfg Fault Frequency Chart
Use this BLANK Chart in Your Notes To Produce Your Chart

Review of Your Exercise # 1 “Pareto Frequency Chart” for Manufacturing Defects
NOW .. What is the most Frequent Problem?
Your Chart Should Look Like This

Exercise 1 - Solution “Frequency of Defects”
Data in Original Sequence

Data Sorted to Frequency Sequence

Exercise 1 - Solution “Frequency Bar Chart”
# Data Converted to
Bar Chart

Exercise 2 =Create the “Pareto Curve” for the Door Defects
Exercise 2 Steps =
Convert the “Number” of each fault to a % of total Defects & calculate the “Cumulative %” of Defects.
Create a Bar Chart that Show the % of Individual Defects (Tallest on the Left) AND
Include the Cumulative % of the Defects in the Chart THEN
Draw a line that joins the tops of each of the Cumulative % “Bars” (That “Curved Line” is the “Pareto Curve”
#
%

Exercise 2 = Convert Chart 1 to “%” of Problems + Add a “Pareto Curve” to the New Chart
Use this BLANK Chart in Your Notes To Produce Your Chart

Complete Exercise # 2 “Pareto Frequency Chart” with Pareto Curve for Manufacturing Defects

Link to Excel Worksheet – How to find the answer!

Exercise 2 SolutionPareto Frequency ChartFrequency % of Defects
# of Defects

Exercise 2 SolutionPareto Frequency ChartCumulative % of Defects

Exercise 2 SolutionPareto Frequency Chart% of Defects & Pareto Curve

QUESTION?
Are the “Hinges” the MOST IMPORTANT Problem to be solved??
YES? or NO?
NO!
It is the “Most Frequent” problem - but we can not be sure if it the most important until we take into account “Other Variables”

Another Variable To Consider!
We know the “Most Frequent” Fault but to get a firm base for a “Decision” we need to consider another key “Variable” …….
“The Cost to fix each Fault!

EXERCISE # 3 Pareto “Fault Costs” Chart
We will now use the same technique with the “Cost “ Data from the Next Slide to create a Pareto Fault “Cost” Chart.
Then we will know the relative “Cost” of each Fault! = 1 step closer to a “Decision Chart”

Exercise 3Pareto Cost Chart
A Pareto Diagram can display the costs of various defects, in order, so you can focus attention on the most important problems.
ASSUME the following costs for each of type of defect.

EXERCISE # 3 Pareto Fault “Cost” Chart
Using the Data from the previous Slide and the Blank “Exercise 2 Graph” in your Notes, make up a Pareto “COST” Chart (a Bar Chart Format) with the:
Highest COST / Tallest Bar on the Left, &
Lowest COST / Shortest Bar on the Right.

Exercise # 3Cost of Individual Defects

QUESTION?
We now know “Hinges” are the MOST FREQUENT fault !
AND
We also know that “Hinges” are the MOST EXPENSIVE fault
SO …
You tell me – Which is the MOST IMPORTANT fault to fix FIRST!

Comparison of Cost & Frequency of Each Defect

What Else Do We Need To Do To Make a Valid Decision?

EXERCISE # 4Pareto Decision Chart
The MOST IMPORTANT Fault to be corrected can not be identified from the date we have so far;
Now we will make up a “Pareto Decision Chart” that we clearly identify the “most important fault” that must be corrected immediately.
Use the same process to construct your Chart and the data for inclusion in your Chart is:
Frequency of each Fault
Multiplied By
The Cost of each Fault. &
Converted to % of Total Costs

Exercise 4 - Pareto Chart“Cumulative Cost of Faults”
Steps Taken:
# of Faults x $ Cost of a Fault = Total Costs
Sort into Sequence Highest Total Cost to Lowest Total Cost

Exercise # 4 Create a“Pareto Decision Chart” that Shows You To Identify the most Important 80% of the Cost of Defects to be Attacked!

Exercise 4 - Pareto Chart“Cumulative Cost of Faults”

Pareto Chart Defects % of Total Costs

Pareto Chart Cost of Defects

Pareto Chart Defects % & Cumulative % of Total Cost

We will work directly from the Excel Worksheet
Link to Excel Worksheet – How to find the answer!

Pareto Decision Chart withPareto Curve or Line
100%
81%
67%
29%
43%
100%
57%
71%
86%

Pareto Charts
Pareto Charts Defined
Pareto charts are used to identify and prioritize problems to be solved.
They are actually histograms aided by the 80/20 rule adapted by Joseph Juran.
Remember the 80/20 rule states that APPROXIMATELY80% of the problems are created by APPROXIMATELY 20% of the causes.

Have YOU Become An 80/20 Individual?
An 80/20 Individual is a person who has learned that in order to have success, they don't need to be increasing their effort by 110%. Most people who do this are simply doing the wrong things more often.
Instead, an 80/20 individual looks at the 20% that is responsible for 80% of their results and then they focus on improving this 20%!
Is it really that simple? ………. Yes!
Once you are taught how and what tools to use to improve your results, the only question left is ..... Will YOUtake action?

Any Questions?

http://blog.rykte.com.br	22
http://www.slideshare.net	20
http://thinkingproblemmanagement.blogspot.com	14
http://jennlynch.wordpress.com	6
http://translate.googleusercontent.com	1
http://www.google.com.ph	1

Pareto Principle Explained

by Ed Simpson on May 20, 2010

Accessibility

Categories

Tags

Upload Details

Usage Rights

6 Embeds 64

Statistics

Pareto Principle Explained — Presentation Transcript