How can you use Pareto charts to prioritize business transformation improvements?

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Business transformation is a complex and challenging process that requires identifying, analyzing, and prioritizing the areas of improvement that can deliver the most value to the organization. One of the tools that can help you with this task is the Pareto chart, a graphical representation of the 80/20 rule that states that 80% of the effects come from 20% of the causes. In this article, you will learn how to use Pareto charts to prioritize business transformation improvements and achieve your strategic goals.

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Iyetule A.

I help CEOs and Founders achieve business outcomes with performance management systems | Head, Corporate Performance @…

1 What is a Pareto chart?

A Pareto chart is a type of bar chart that shows the frequency or impact of different factors or problems in descending order, along with a cumulative line that indicates the percentage of the total effect. The chart is based on the principle of Pareto efficiency, which states that a situation is optimal when no one can be made better off without making someone else worse off. In other words, a Pareto chart helps you identify the most significant factors or problems that account for the majority of the outcomes or issues, and focus on solving them first.

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Evandro Dias

Supervisor de Produ??o | Coordenador de Produ??o | Gerente de Produ??o | TPM | Lean Manufacturing
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Algumas maneiras de se fazer... Identifica??o dos Problemas ou Oportunidades Coleta de Dados Relevantes Classifica??o dos Dados Cria??o do Gráfico de Pareto Análise do Gráfico de Pareto Prioriza??o de Melhorias Implementa??o de A??es Corretivas Avalia??o Contínua Simples, porém objetivo. Até mais.

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2 How to create a Pareto chart?

Creating a Pareto chart requires you to define the problem or goal you want to improve or achieve through business transformation. You must then identify the possible causes or factors that contribute to the problem or goal, and collect data on their frequency or impact. After sorting the causes or factors in descending order of frequency or impact, calculate the cumulative percentage for each one. Plot the causes or factors as bars on the primary vertical axis and the cumulative percentage as a line on the secondary vertical axis. Draw a horizontal line at 80% on the secondary axis and note which causes or factors lie on the left of it; these should be prioritized for improvement as they account for 80% of the problem or goal.

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Monica Constantin

CFO | Specialist FP&A | Lector @AcademiaFinanciara
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While creating a Pareto chart is a valuable tool for prioritizing issues based on their impact, it's important to also consider the complexity and feasibility of addressing each factor. Some issues, despite having a significant impact, might require disproportionate resources or time to resolve. Conversely, less impactful issues might be resolved quickly and easily, leading to immediate improvements. Therefore, when using a Pareto chart, complement it with an assessment of the practicality of addressing each issue. This balanced approach ensures that prioritization is not only based on impact but also on the practical aspects of implementation, leading to more efficient and effective problem-solving.

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3 How to use a Pareto chart to prioritize business transformation improvements?

A Pareto chart can help you prioritize business transformation improvements by showing you where to allocate your resources and efforts for the maximum benefit. For example, if you want to improve customer satisfaction, you can use a Pareto chart to analyze the frequency or impact of different customer complaints, and identify the ones that cause the most dissatisfaction. Then, you can focus on addressing those complaints first, and monitor the changes in customer satisfaction over time. Similarly, if you want to increase revenue, you can use a Pareto chart to analyze the contribution of different products, services, or segments to your total revenue, and identify the ones that generate the most value. Then, you can focus on enhancing or expanding those offerings first, and measure the changes in revenue over time.

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4 What are the benefits of using a Pareto chart?

Using a Pareto chart can bring several benefits to your business transformation process, such as simplifying and visualizing complex data and problems to make them easier to comprehend. It can also help you identify and eliminate the root causes of the issues, rather than the symptoms or effects. Additionally, it can optimize resource allocation and efficiency by focusing on the most impactful factors or causes, while avoiding trivial or insignificant ones. Lastly, a Pareto chart can help track and evaluate your progress and results by comparing the before and after situations, and measuring the improvement or achievement.

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5 What are the limitations of using a Pareto chart?

Using a Pareto chart for business transformation improvements can be beneficial, yet there are some limitations to be aware of. For instance, it does not provide any information on the interrelationships or dependencies among the factors or causes that could impact outcomes or solutions. Additionally, it does not provide guidance on how to solve or improve the factors or causes, and it does not consider the variability or uncertainty of the data. Furthermore, it does not consider the trade-offs or costs of the improvements or solutions that could have negative implications.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Iyetule A.

I help CEOs and Founders achieve business outcomes with performance management systems | Head, Corporate Performance @ Ikeja Electric | MBA | MSc.| PMP | PRINCE2 Practitioner | ITIL | Scrum | Six Sigma
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Pareto charts are popular tools for choosing what matters most. But some disagree with using only the 80/20 rule. In my experience, it's beneficial to be flexible and update your plans regularly, depending on what your business requires. This makes you more adaptable and avoids being stuck in old methods. It also helps you enhance faster and more efficiently.

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How can you use Pareto charts to prioritize business transformation improvements?

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1 What is a Pareto chart?

2 How to create a Pareto chart?

3 How to use a Pareto chart to prioritize business transformation improvements?

4 What are the benefits of using a Pareto chart?

5 What are the limitations of using a Pareto chart?

6 Here’s what else to consider

Performance Management

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How can you use Pareto charts to prioritize business transformation improvements?

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1 What is a Pareto chart?

2 How to create a Pareto chart?

3 How to use a Pareto chart to prioritize business transformation improvements?

4 What are the benefits of using a Pareto chart?

5 What are the limitations of using a Pareto chart?

6 Here’s what else to consider

Performance Management

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