Pareto analysis

Pareto analysis is a statistical technique in decision making that is used for selection of a limited number of tasks that produce significant overall effect. It uses the Pareto principle – the idea that by doing 20% of work, 80% of the advantage of doing the entire job can be generated. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%).

Pareto analysis is a formal technique useful where many possible courses of action are competing for attention. In essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most effective actions that deliver a total benefit reasonably close to the maximal possible one.^{[citation needed]}

Pareto analysis is a creative way of looking at causes of problems because it helps stimulate thinking and organize thoughts. However, it can be limited by its exclusion of possibly important problems which may be small initially, but which grow with time. It should be combined with other analytical tools such as failure mode and effects analysis and fault tree analysis for example.^{[citation needed]}

This technique helps to identify the top 20% of causes that need to be addressed to resolve the 80% of the problems. Once the top 20% of the causes are identified, then tools like the Ishikawa diagram or Fish-bone Analysis can be used to identify the root causes of the problems.

The application of the Pareto analysis in risk management allows management to focus on the 20% of the risks that have the most impact on the project.^[1]

Steps to identify the important causes using Pareto analysis^[2]

• Step 1: Form an explicit table listing the causes and their frequency as a percentage.
• Step 2: Arrange the rows in the decreasing order of importance of the causes (i.e., the most important cause first)
• Step 3: Add a cumulative percentage column to the table
• Step 4: Plot with causes on x- and cumulative percentage on y-axis
• Step 5: Join the above points to form a curve
• Step 6: Plot (on the same graph) a bar graph with causes on x- and percent frequency on y-axis
• Step 7: Draw line at 80% on y-axis parallel to x-axis. Then drop the line at the point of intersection with the curve on x-axis. This point on the x-axis separates the important causes (on the left) and trivial causes (on the right)
• Step 8: Explicitly review the chart to ensure that at least 80% of the causes are captured

See also

• Pareto distribution
• Pareto chart
• Pareto interpolation
• Ishikawa diagram
• Kepner-Tregoe

This article includes a list of references, but its sources remain unclear because it has insufficient inline citations. Please help to improve this article by introducing more precise citations. (July 2010)

References

1. ^ David Litten, Project Risk and Risk Management, Retrieved May 16, 2010
2. ^ "Pareto Analysis". http://erc.msh.org/quality/pstools/pspareto.cfm. Retrieved 12 January 2012.