Decision Making - Pareto Analysis

What is a Pareto Analysis?

Ideally, as a project manager wants to focus your attention on fixing the most critical problems. But how do you determine or find which problems you need to deal with first? And are some problems caused by the same underlying issues.

A Pareto analysis is the method of finding out all the root causes of a problem and trying to ascertain which one of these causes have the greatest frequency. The main thinking behind the analysis is that an entire collection of potential causes can be broken down into those that seldom happen and those that happen on a more frequently.

Why is it known as 80/20 Rule?

In 1906, Italian economist Vilfredo Pareto discovered that 80% of the land in Italy was owned by just 20% of the people in the country. He proceeded further this research and found out that the disproportionate wealth distribution was also the same across all of Europe.

A Romanian-American business theorist named Joseph Juran stumbled on Pareto’s research work and gave name “80/20 rule” to Pareto’s Principle of Unequal Distribution.

Juran used Pareto’s Principle in business situations to understand whether the rule could be applied to problems faced by businesses. He observed that in quality control departments, most production defects resulted from a small percentage of the causes of all defects, a phenomenon which he described as “the vital few and the trivial many.”

The British NHS Institute for Innovation and Improvement provided that 80% of innovations comes from 20% of the staff; 80% of decisions made in meetings comes from 20% of the meeting time; 80% of your success comes from 20% of your efforts etc.

How to Use the Tool

Step 1: Identify and List Problems

Firstly, note down all problems that you need to resolve. Where possible, talk to clients and team members to get their input, and draw on surveys, help-desk logs where these are available.

Step 2: Identify the Root Cause of Each Problem

For each problem, identify its fundamental causes.

Step 3: Score Problems

Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying to solve. For example, if you're trying to improve customer satisfaction, you might score them on the basis of the number of complaints eliminated by solving the problem.

Step 4: Group Problems Together By Root Cause

Group problems together by root causes.

Step 5: Add the scores

 Add up the scores for each cause group. The group with the top score should be the highest priority, while the one with the lowest score should be the lowest priority.

Step 6: Take Action

Now start tackling the causes of the problems. Deal with the top-priority problem, or group of problems, first.

Pareto Analysis Example

James Bond has been appointed as Project Manager in service center. His objective is to increase overall customer satisfaction.

He decides to score each problem by the number of complaints that the center has received for each one.

In the table below, the second column shows the problems he has listed in step 1 above, the third column shows the underlying causes identified in step 2, and the fourth column shows the number of complaints about each column identified in step 3

Now James Bond needs to group the problems and add the scores (step 4 & step 5 above)

He scores each group by the number of complaints, and orders the list as follows:

·        Lack of training– 59 complaints.

·        Too few service center staff – 28 complaints.

·        Poor organization and preparation– 10 complaints.

From the above chart, James Bond will get the major benefits by arranging more training for staff. After it the number of complaints may decline, and training should help people to be more productive. It's possible, however, that this won't be necessary to increase more staff.

By using Pareto Analysis, James Bond is able to focus on training as an issue, rather than making his effort over taking on new staff members etc.

Today, Pareto Analysis is employed by managers in all industries who try to determine which issues are causing the most problems within their departments, organizations, or sectors.