Pareto Chart: Continuous Process Improvement. The Pareto Chart is a simple way of illustrating where the bulk of the problems in the process originates.
Do you remember bar graphs at school? With a Y and X axis, and bars showing the numerical value of categorised data? The chances are, they were probably one of the easier topics to learn (let’s not forget the wizardry of Algebra!).
Whilst they provide a simple demonstration of data, their usage goes far beyond that of the classroom and the dreaded exam papers.
A type of bar graph, known as the Pareto chart, is used in business (and other areas too) to highlight where defects originate from in operational processes – both their frequency and their cumulative impact. In business, like in school, they provide a straightforward method for data organisation and analysis.
They are commonly used as a continuous improvement tool in the Lean Methodology theory, which aims to cut out all the processes that don’t bring value to your service or product. Let’s look at how they work, what they are used for, where they can be used, and what they show.
What does a Pareto Chart show?
- The bars represent the frequency of the defect, whilst the line demonstrates the cumulative percentage impact.
- The bars are presented in descending order, therefore clearly showing where the defects are more prominent at a glance.
How does a Pareto Chart work?
So, you have all your defects in a line – now what? How is the data interpreted?
This is where we look to the 80/20 theory (also known as the Pareto Principle) – a theory that states that 80% of the results are determined by 20% of the causes. In other words, this means that just 20% of the results will be causing 80% of your defects. By looking at your graph, you can see the visual representation of this. The two tallest bars will indicate which are the biggest source of your problems.
The Pareto Principle is actually a universal theory that can be attributed to a number of walks of life – not just business. It was developed in the 19th-century, by an Italian man called Vilfredo Pareto, who had noticed that only 20% of his pea plants were generating 80% of the peas! Interestingly, this led Pareto to ponder at other uneven distributions that occurred, like the land distribution at the time, with 80% of Italy being owned by just 20%.
This was then developed into the business theory it is today by Dr. Joseph M. Juran (creator of the Juran Trilogy), who noticed that it was a small number of defective processes and parts that led to issues with quality. It was he who recognised that ‘separating the vital few from the trivial many’ was true of many factors within the business, and it could be applied to almost all types of organisation!
We’ll have a look at what Pareto charts are used for next, but you may also want to find out about the other uses of this Universal theory – it can be applied to many concepts – even which and how often you wear items of your wardrobe!
What is a Pareto chart used for?
In business, as long as your data is categorised, and the ranking of these categories makes a difference – a Pareto Chart can be used as a continuous improvement tool.
A Pareto chart is a clear way of identifying and demonstrating which processes are the least efficient and causing the large bulk of problems with your product or your production line. However, it can be used for various other reasons and is a particularly useful tool for tracking KPIs – sales, productivity levels, SEO results and many more. It’s perfect for answering questions such as what are the most common customer complaints? And where is the most revenue being generated? The visual representation of data helps you to understand the individual impact of specific groups on the complete total.
It can even be used as a decision-making tool, helping you to decide on which upcoming projects to tackle first. Like we said, as long as the data can be categorised, and ranking makes a difference – you’re onto a winner!
When is a Pareto chart used?
As you can tell, the Pareto chart has numerous uses in a business. But when is the right time to use one? It’s a continuous improvement tool, and so should be used as ongoingly, however, there are specific times when the data gained from the Pareto chart can have big effects, and you may not have even thought of it.
Early on in your quality improvement process
Identifying where improvements can be made early on in the quality improvement process is a highly valuable move for a business, which can then dedicate resources to the areas that need it. Sometimes, data can bring surprises – ones that an organisation would not have thought of prior to the Pareto chart results.
For example, leadership may be inclined to believe that customer complaints are caused by product defects. When they do the research, they find there are more complaints about delays in shipping. The problem is that customers can sometimes shout louder about certain problems.
Later in your quality improvement process
After the improvement, processes have been identified, and the team assembled, the Pareto chart can be used as a tool to select areas to focus on. Problems are often complex and multifaceted, it is, therefore, important to consider all possible causes, identify which one is having the highest effect, and then focus attention on those. This leaves out any room for interpretation and people following their ‘gut,’ which is not always the best direction for a business.
For instance, you would find out the various reasons for the shipping delay problems, and dedicate time to the problems that were in the top 20%.
To build consensus
A Pareto chart can also help to resolve conflicts between team members. Have you heard of the phrase – too many chefs can spoil a broth? Often, employees can have different ideas about what is right for a business, and having data clearly demonstrated for all to see, can be a great way to resolve this. This will ensure everyone is on the same page when looking to reach that same goal.
For example, the warehouse team may be blaming the manufacturing team for delays in production, and vice versa. However, if you do the research, you may find that neither groups are responsible, and actually, the focus needs to be laid elsewhere.
So, why use a Pareto Chart?
The Pareto chart really is a simple, but effective method of identifying where the problems lie in your business. Demonstrating data clearly using the 80/20 rule, a Pareto chart comes in handy right across an organisation, even in areas where you may not think.