The Pareto Chart: How to Solve Problems & Make Informed Decisions

Pareto-chart

I’ve just finished watching this Netflix docuseries and I can’t stop thinking about it.

The Last Dance.

It’s ten juicy episodes, full of massive egos, incredible basketball, and a banging 90’s hip-hop soundtrack. It’s a fantastically brutal account of how the Chicago Bulls came to dominate the basketball scene throughout the 1990s.

The team was led to countless victories by three key players: Michael Jordan, Scottie Pippen, and Dennis Rodman.

This, coincidentally, demonstrates the concept behind the Pareto chart, and this Process Street post perfectly.

I’ll explain what I mean by this later. First, let me go through what we’ll cover in this post:

I’m excited to get started. So, my cagers, let’s take it to the hole!

I admit. I may have googled “basketball terms” for that sentence… what I’m basically saying is; C’mon you lot! Let’s go!

What is a Pareto chart?

Remember math lessons as a kid? I mean before it began to get tricky with trigonometry and algebra. When it was working through straightforward sums and creating graphs? The ‘fun’ stuff.

Well, keep hold of that memory as it will come in handy for this post.

Why?

Because the Pareto chart is, essentially, a plain old bar graph.

A Pareto chart, in its simplest form, is a bar chart that arranges the bars from largest to smallest, from left to right. The bigger bars on the left are more important than the smaller bars on the right.

Like a lot of bar charts.

pareto-chart
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However, this simple little bar chart is different from the bar charts you created when you were six. This bar chart is used by organizations, in almost every industry, for root cause analysis. In other words, it’s a vital quality management tool.

A Pareto chart enables organizations to make decisions on where to focus their efforts so they get as much bang for their buck as possible.

How does a humble bar chart do that?! I hear you ask.

Well, it’s so simple it almost sounds silly.

By graphically separating the aspects of a problem, an organization can instantly see where to direct its improvement efforts. Focusing its efforts on reducing the largest bars in the chart, will do more for overall improvement than reducing the smaller ones.

Take this Pareto chart below as an example.

pareto-chart
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With a quick glance, we can instantly see that a lack of training and inadequate pay cause the highest number of customer service complaints.

The Pareto chart theory suggests that if the organization prioritized training and increasing pay, they would see the biggest improvement in customer service.

It’s a tool that’s been used for decades by problem solvers to separate the vital few factors from the trivial many and prioritize actions.

For those that are familiar with the 80/20 rule, the phrase ‘separating the vital few from the trivial many’ may have rung a few bells?

That’s because the Pareto chart is a visual representation of the 80/20 rule.

The 80/20 rule states that 80% of the results are determined by 20% of the causes. The Pareto chart displays the few, most significant defects, that make up most of the overall problem.

By ordering the bars from the largest to the smallest, a Pareto chart helps you to visualize which factors comprise the 20% that are the vital few, and which factors make up the trivial many.

The significant few things will generally make up 80% of the whole, while the trivial many will make up about 20%” – Pareto Diagram, PQ Systems

While we’re on the subject of the 80/20 rule, for those of you who don’t know, the 80/20 rule is also referred to as the ‘Pareto principle’. This leads me, quite nicely, to talk about where the Pareto chart came from.

Where did the Pareto chart come from?

You’re going to love this.

This is the story behind where the Pareto chart came from.

The Pareto chart takes its name from a 19th-century Italian called Vilfredo Pareto, and as we touched on earlier, the concept is based on the 80/20 rule.

Pareto, a philosopher, economist, and keen gardener, had an epiphany one day, while out picking peas.

pareto-chart
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He noticed that roughly 20% of his pea plants seemed to generate around 80% of the peas.

Now, most of us might’ve thought; “Hah! Well, would you look at that!” and carried on with our daily lives.

But not Vilfredo Pareto.

This observation led him to think about uneven distribution, and where better to start with that concept than by looking at wealth.

He discovered that around 80% of the land in Italy was owned by 20% of the population.

He then investigated different industries and found that 80% of production typically came from only 20% of companies.

Although he researched and wrote papers on this theory, he never took it further than wealth and prosperity.

It was the “Father of Quality Management” Dr. Joseph M. Juran, who extended this theory into the business world.

Juran, while detecting manufacturing problems at Western Electric, noticed that a small number of defects in parts and machines seemed to cause most of the issues he found in quality.

He came across Pareto’s earlier work and found it made a lot of sense.

He recognized that “the vital few and the trivial many” pattern was a universal principle that could be applied to almost all organizations, in any industry, to help them make decisions on what to focus on to improve quality.

This theory is proven when you look at examples like these:

So that’s how the Pareto principle came about.

The Pareto chart, being a visual representation of the Pareto principle, was developed to allow companies to see where the major causes of a problem were. This enabled them to focus their time and efforts on the greatest potential for improvement.

It’s common sense to focus on the ‘vital few’ factors. In the quality improvement arena, Pareto charts help teams direct their efforts where they can make the biggest impact” – When to Use a Pareto Chart, The Minitab Blog

We all know how to look at a bar chart and work out what it’s telling us, but there’s a little more to interpreting a Pareto chart than meets the eye.

How to read a Pareto chart

As we’ve previously covered, in its simplest form, a Pareto chart is a bar graph that shows where the biggest opportunities for quality and process improvement lie.

It’s simple, easy to read and there’s nothing wrong with using this method to decide where to focus your efforts.

However, there is another, arguably more accurate, way of interpreting a Pareto chart.

We can take the simple bar chart a step further by adding in a line.

pareto-chart
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The line, like the one in the example above, is a cumulative percentage line.

Ok, I know. Earlier I urged you to remember the ‘fun’ math. I don’t remember line graphs and cumulative percentages being much fun either, but stick with me. It’s nowhere near as bad as Algebra or Pythagoras.

To understand how to read a Pareto chart, like the one above, we first need to understand the components of a Pareto chart and the relationship between each one.

So let’s start by looking at the basic structure of a Pareto chart, using the below ‘shirt defect’ chart as an example.

pareto-chart
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We can see that there are three axes in this chart: X, Y, and Z which represent the following:

  • X-axis shows the different types, or categories, of defects
  • Y-axis shows how often these defects occur

We’ll talk about the third axis in a second.

We can see that each vertical bar in the chart represents a type of defect and the height of each bar represents the frequency in which that type of defect occurs.

So, from the example above, we can see that button defects occur 23 times, whereas sleeve defects happen only three times.

We can also see that the bars are presented in descending order (from tallest to shortest) so we can instantly see which defects are most frequent at a glance.

Now we understand that bit, let’s bring in the third axis.

  • Z-axis represents the cumulative percentage

The cumulative percentage indicates what percentage of all defects can be removed if the most important types of defects are resolved.

To plot the cumulative percentage line, you’ll need to get your calculator out and work out the cumulative percentage for each defect using this formula:

Total frequency of all defects / The frequency of each defect x 100.

Plot these percentages as you would on any normal graph and then join them up with a line.

pareto-chart
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Now you have your cumulative percentage line, using the Pareto principle, find the 80% mark on the Z-axis, and draw a dotted line across until you hit your cumulative percentage line.

Then, immediately drop your dotted line downwards.

pareto-chart
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The defects to the left of this dotted line, on the X-axis, are the defects that, if addressed, will deliver the greatest benefit. These are the ‘vital few’ defects, out of the ‘trivial many’, to focus on.

Let’s go back to our shirt defect example. According to the Pareto principle, if we focused our efforts on resolving the pocket and button defects, we should see the biggest improvement in the quality of our shirts.

It’s worth noting that, in any Pareto chart, when the cumulative percentage line is steep, the types of defects are likely to have a significant effect. When the cumulative percentage line starts to flatten, the types of defects aren’t likely to influence the outcome as much, so they don’t deserve as much attention.

Once you’ve used a Pareto chart to decide what to focus your efforts on, it’s a great time to then bring something like the PDCA cycle into your organization to help you manage the changes you need to implement.

In fact, Process Street has created a few change management templates that you can access, for free, to help you with this.

PDCA Cycle Change Management Model Process Checklist

Click here to access the PDCA Cycle Change Management Model Process Checklist!

Satir Change Management Model Process Checklist

Click here to access the Satir Change Management Model Process Checklist

I’ve only given you two change management templates in this post, but we have heaps more for you to use. Take a look at this post.

My word. I have steam coming from my ears. I’ve had enough of math, fancy a game of basketball instead?

When to use a Pareto chart

As we’ve already established, Pareto charts are used by organizations to figure out where the problems are and decide what to focus on to get the best results.

Pareto charts are most useful for identifying what the biggest issues regarding your business are. They also help you analyze how to present the issues that need tackling in a simpler, more understandable manner. In addition, they also help to guide where to look in terms of figuring out the frequency of a certain problem in your company” – How to Do Pareto Chart Analysis, Tallyfy

Below are a few ways you might use a Pareto chart to make key decisions in your organization:

  • You could use it to work out which top 20% of your company’s processes are causing 80% of the problems and focus on refining those processes.
  • You could use it to establish which 20% of your clients are responsible for 80% of your sales and create a high-touch program for them.
  • You could use it to assess all your upcoming projects, decide which ones will make the most difference, and start those first.
  • You could use it to decide which tasks to prioritize, like the CEO of Dell does. He uses a Pareto chart on a daily basis to make sure he spends 80% of his time on the 20% of tasks that will generate the biggest results.

Speaking of daily tasks, once you’ve used the Pareto chart to decide what to focus on, you could use this Remote Daily Work Schedule Template to help keep you on track:

Although the checklist is for remote workers, you can adapt it if you’re office-based. I’ll tell you how to do that in a second.

So you can see that the Pareto chart can be been applied in all sorts of settings. And as it turns out…

It also applies to both the NBA and the WNBA. Specifically, in general, about 80% of a team’s wins are produced by a team’s top three players” – The Pareto Principle Sheds Light On The WNBA’s Western Conference Contenders, Forbes

If you were a basketball coach, you could use a Pareto chart to determine which 20% of the team contribute to 80% of the wins, and focus your time and efforts on improving those players.

Kind of like what possibly happened between 1991 and 1998 with the Chicago Bulls.

pareto-chart
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As I touched on earlier, the Netflix mini docuseries ‘The Last Dance’ shows how the Chicago Bulls became unbeatable in the ’90s.

The team won the NBA championship six times over the course of eight years thanks to three players (Micheal Jordan, Scottie Pippen, and Dennis Rodman), and some sound decisions, made by head coach, Phil Jackson.

**Conspiracy alert!**

pareto-chart
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Surprisingly, the Netflix series doesn’t state whether Phil Jackson utilized the Pareto chart to make the critical decision to focus his coaching efforts on Jordan, Pippen, and Rodman. But I’d like to think it had a part to play in the Bull’s success.

(Maybe a 20% part?!)

Now we know what the Pareto chart is, where it came from, how to read it, and when to use it, let’s talk about how to create one.

How to create a Pareto chart with Process Street

As we’ve discussed, one of the greatest uses for the Pareto chart is in quality control and process improvement.

This is something that Process Street is expert in.

Process Street is super-powered checklists.

Our state of the art business process management (BPM) software allows you to create templates, run individual checklists, and manage recurring tasks faultlessly.

Watch this introductory video to get a better idea about who we are and what we do:

So as you can see, you can check tasks off as you work through them, set deadlines, request approval from colleagues, assign tasks, and track each team member’s progress. You can also connect to thousands of apps through Zapier, webhooks, or API integration.

How can all this help you create a Pareto chart though?

Glad you asked.

You could create a template, and, each time you want to create a new Pareto chart, run a new checklist from this template.

It’s super easy.

All you’d need to do is create a new template and add the following 12 steps into your template, as tasks, that you can then work through:

Step 1: Identify the problem
Define the problem as accurately as you can so you can work out all the various factors that may be contributing to it, in the next step.

Step 2: List the contributing factors
Determine what root causes are contributing to the problem and put them into categories.

Step 3: Decide on the measurement
Establish how you will measure the impact of each contributing factor or category. This is usually the number of occurrences or cost.

Step 4: Establish a time period
Decide what period of time the Pareto chart will cover: One sprint? One full day? A week?

Step 5: Collect the data
Collect the data for each of the categories you have chosen and place it into a table so you can work out your cumulative percentages easily.

Step 6: Draw the Y-axis and X-axis
Label the Y-axis with the measurement and the X-axis with the categories.

Step 7: Construct and label bars for each category
Place the tallest at the far left, then the next tallest to its right, and so on.

Step 8: Draw Z-axis
Once you’ve drawn the right vertical axis, label it with percentages.

Step 9: Calculate your cumulative percentages
Use this calculation to work out your cumulative percentages: Total frequency of all categories / The frequency of each category x 100.

Step 10: Plot and draw your cumulative percentage line
Make sure that the last dot reaches 100% on the Z-axis (as all cumulative percentage must reach 100%)

Step 11: Establish what your focus should be
Find 80% on the Z-axis and draw a horizontal line until it hits the cumulative percentage line. Whatever lies to the left of that point is your ‘vital few’.

Step 12: Implement the changes
Using change management processes like the Lewins Change Management Model, or the ADKAR Model start to implement the changes that will cause the most affect.

That’s it! Simple.

If you’re a little unsure, don’t worry. To help get you used to the software, below are some similar problem solving, root cause analysis templates that you could use to get started:

FMEA Template: Failure Mode and Effects Analysis

Click here to access the FMEA Template: Failure Mode and Effects Analysis Template!

Root Cause Analysis Template

Click here to access the Root Cause Analysis Template!

SWOT Analysis Template

Click here to access the SWOT Analysis Template!

If you’re feeling a bit braver, you could edit the existing templates so they suit your organization better, or even create your own Pareto chart process template.

If you’re planning to go down this road, try adding some of these features into your template:

These features will help you to automate your newly created processes.

I can’t even begin to tell you how much time and effort automating your business processes will save you. But I know a man who can.

Blake Bailey.

He ran the below Process Street webinar on advanced workflow automation. Watch it. It’ll explain everything there is to know about workflow automation, and I guarantee you’ll never create a manual, laborious process even again!

Or, check out these great articles on how you could automate your business:

Speaking of great articles, we’ve written tonnes on quality management, process management, root cause analysis, and the like.

Check out a few of them below.

Pareto chart related articles

When you’re trying to get the most bang for your buck, focusing on the critical 20% is a huge time-saver. See what activities generate the most results and give them the appropriate attention.

So, my cagers, that’s it! But before I shoot my last shot, if a Pareto chart seems a bit basic, well, it is.

However…

Its very simplicity makes the Pareto chart applicable to a very wide range of situations, both within and beyond quality improvement” – When to use a Pareto Chart, Minitab

Do you use the Pareto chart in your organization? If so, how do you find it? We’d love to hear your thoughts in the comments below. Who knows? You may even get featured in an upcoming article!

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Amanda Greenwood

Amanda is a content writer for Process Street. Her main mission in life is to write content that makes business processes fun, interesting, and easy to understand. Her background is in marketing and project management, so she has a wealth of experience to draw from, which adds a touch of reality and a whole heap of depth to the content she writes.


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