What is Pareto Principle?

The original observation of the Pareto Principle was linked to the relationship between wealth and population. According to what Pareto observed, 80% of the land in Italy was owned by 20% of the population. After surveying a number of other countries, he found the same applied abroad. For the most part, the Pareto Principle is an observation that things in life are not always distributed evenly.[1]

The Pareto Principle helps to prioritize the problems which have been determined after conducting root cause analysis. It can be applied in various fields however it may not apply in some cases.

The 80/20 rule:

According to Pareto’s principle, The 80/20 rule can be applied to most business fields yet on a personal level:

• 80% of customer complaints arise from 20% of your products and services.
• 80% of delays in the schedule result from 20% of the possible causes of the delays.
• 20% of your products and services account for 80% of your profit.
• 20% of your sales force produces 80% of your company revenues.
• 20% of a systems defects cause 80% of its problems.

The Pareto Principle has many applications in quality control. It is the basis for the Pareto diagram, one of the key tools used in total quality control and Six Sigma.

Applying Pareto Principle in business:[2]

Here are eight steps to identifying the principal causes you should focus on, using Pareto Analysis:

1. Create a vertical bar chart with causes on the x-axis and count (number of occurrences) on the y-axis.
2. Arrange the bar chart in descending order of cause importance that is, the cause with the highest count first.
3. Calculate the cumulative count for each cause in descending order.
4. Calculate the cumulative count percentage for each cause in descending order. Percentage calculation: {Individual Cause Count} / {Total Causes Count}*100
5. Create a second y-axis with percentages descending in increments of 10 from 100% to 0%.
6. Plot the cumulative count percentage of each cause on the x-axis.
7. Join the points to form a curve.
8. Draw a line at 80% on the y-axis running parallel to the x-axis. Then drop the line at the point of intersection with the curve on the x-axis. This point on the x-axis separates the important causes on the left (vital few) from the less important causes on the right (trivial many).

Example:

The following example outlines the number of causes which led to customers’ complaints during a period of 12 months:

[1] Chappelow  Jim, Pareto principle, 29 August 2019, Investopedia,dot-dash,  4 April 2020, https://www.investopedia.com/terms/p/paretoprinciple.asp

[2] Duncan Haughey, Pareto analysis step by step, 8 March 2020,  www.projectsmart.co.uk.