Pareto Analysis – An analysis that can change your life!

Mr. Pushpesh Pathak is a certified coach and management trainer. He thinks his reading, research and knowledge should be shared to all through his lectures, trainings, articles, you tube videos. So here we start this series of articles.

It comes long way:

Pareto Principle comes a long way and have strong foot in History. A famous Italian economist, Vilfredo Pareto found the ‘Pareto Principle’ or ‘Pareto Analysis’ in 1879.

Pareto based his principle on research in which he found that 80% of Italy’s wealth was held by 20% of its population. Pareto Principle’ is also known as ‘Pareto Law’, ‘Pareto Rule’, ‘Principle of Imbalance’ or simply ‘The 80/20 Rule’. After the concept was introduced to the world by Alfred Pareto, people in various disciplines found that the 80/20 was applicable to a wide range of phenomena.

What is the Pareto Principle?

The Pareto Principle states that ‘20% of the input (time, resources, effort) accounts for 80% of the output (results, rewards). This means that whether it is a business or an individual, you get 80% of your results from just 20% of your time and effort. Therefore, 80% of your time is virtually wasted on non-productive activities. Once you realize this, it is easy to take. Every organization and individual can use the ’80 – 20 Rule’ or the ‘Pareto Principle’ to reduce or eliminate its useless activities and can significantly improve your productivity. The ’80-20 Rule’ helps us focus on those activities that brings us the ‘Implementing a strategy based on the 80-20 rule can lead to increased productivity, maximized profits, greater leisure time and overall improvement of the way everyone works. Higher return’.

One concept, Many Names

‘Pareto Analysis’ is known by many different names such as:

  1. The ‘Pareto Principle’
  2. ‘The Law of The Vital Few and the Trivial Many’
  3. The ‘Power Law’
  4. Participation Inequality’
  5. The ’80 – 20 Rule’
  6. ABC Analysis Technique
  7. Principle of Imbalance’

 

Why to use this Principle?

 It helps to reduce operating costs

  1. It is used to bridge the gap between efforts and achievements
  2. It helps to grow and develop the business
  3. It helps to identify crucial problems
  4. It helps you to focus on and use your core strengths
  5. It helps to focus on activities that produce the greatest outcomes
  6. It helps to maximize productivity
  7. It helps to eliminate or reduce non productive and low priority activities
  8.  It is used as an gross error checking tool

Implications of the '80 – 20 Rule'

  1. 80% of work is produced by 20% of the people 
  2. 80% of the sales volume of an organization comes from 20% of distributors
  3. 80% of results are achieved from 20% of the effort 
  4. 80% of income is earned by 20% of workforce who are the actual performers 
  5. 80% of the income of an individual comes from 20% of what he does 
  6. 80% of the marketing results is achieved from 20% of the marketing effort

Examples of Pareto Principles

  1. 20% of the Causes – Results 80% of the Effect
  2. 20% of the enhancements – Consume 80% of Maintenance Costs
  3. 20% of the tools – Experience 80% of the Tool Usage
  4. 20% of the Input – Produces 80% of the Output
  5. 20% of the Efforts – Produces 80% of the Products
  6. 20% of the repairs – Consume 80% of repair costs
  7. 20% of the Modules – Consume 80% of the Resources
  8. 20% of the streets handle 80% of the traffic
  9. 20% of the paper has 80% of the news
  10. 20% of a home collect 80% of the dust
  11. 20% of the people cause 80% of the problems
  12. 20% of the features of an application are used 80% of the time
  13. 80% of your phone calls go to 20% of the names on your list
  14. 80% of the meals in a restaurant come from 20% of the menu

According to a Management Theory, it is proposed that you should use Pareto’s Principle in such a way as to produce what is called ‘Superstar Management’. The supporters of this theory propose that you should focus your limited time on managing only on the 20 percent of your people that produce 80 percent of your results, that is, the superstars. However, this theory is flawed because it overlooks the fact that 80 percent of your time should be spent in doing what is really important. So, you should concentrate your efforts on helping the good become better. This is a better use of your time than helping the great to become terrific. Therefore, apply the Pareto Principle and use it wisely to all you do.

Where can we apply this principle : Almost everywhere

  1. Time Management 
  2. Maximum productivity
  3. Achieving sales target 
  4. Critical Mistake Analysis (CMA) 
  5. Customer Relationship Management (CRM) 
  6. Loyalty Marketing strategy
  7. Social Sciences 
  8. Inventory & Purchase 
  9. Marketing 
  10. Purchase & Supplies 
  11. People & Productivities
  12. Management
  13. Economy 

Uses of Pareto Analysis

  1. Pareto Analysis is particularly useful for finding errors or problems that cause 80% of your problems in any process.
  2. Identify, categorize and distinguish into levels such things as errors, defects, delays, customer complaints or any other measures of quality. Deviations from such measures of quality in your process will help you identify different classes or types of problems.
  3. You can also use Pareto Analysis to display the results of your findings graphically, so that the significant problems emerge from the general background.

Process of Pareto Analysis

  1. Decide how you will classify your problems. You can do this by taking into consideration the reasons for returned or rejected material, customer complaints, results of customer surveys, talking to your customer, or examining the rework aspects of your process.
  2. Now, make a list of all the preliminary list of problem categories. You should try and keep the ‘preliminary problem categories’ to a maximum of six or seven. However, as you continue your analysis, you may need to modify this list.
  3. Consider and decide on a time frame or other scope limitations on the material you will consider. Keep in mind that the time frame or scope you choose should represent the whole process that you are examining.
  4. Now, for each problem category, tally the frequency of occurrences. You can also tally the cost or time for each problem category, if it is an issue. You can tally under a category ‘other’ for any problem that does not fit in any of your classifications.
  5. For each classification, determine the total occurrences or total cost or total time. Now, sum up all these totals to get a grand total.
  6. Find the cumulative percentage under each problem classification by dividing each classification total by the grand total. This cumulative percentage shows the percentage of each individual problem classification out of all the problems.
  7. List and arrange the problem classifications in order from highest value or most frequent to lowest value or least frequent. You should always arrange the ‘other’ category at last even if it is larger than some of the others.
  8. Take a graph and draw a horizontal axis and two vertical axes. Mark the left vertical axis in increments from zero to the grand total of all the problem classifications. Mark the right vertical axis in increments from zero to 100%.
  9. Construct the vertical bar diagram. The height of each bar corresponds with the value or number of occurrences on the left axis and the percentage of the total on the right axis. Keep the width of all bars same and make sure that they do not touch each other.
  10. Label the bars under the horizontal axis. Remember that you should label the bars on the horizontal axis based on the ‘problem category’ that you have identified based on the analysis of the data.
  11. Now, plot a line by beginning at the left zero point and joining all the points of the cumulative percentage total reached with the addition of each problem classification. Your line should end at the 100% mark on the right axis.
  12. Label and add a Title to your chart. You can also add a brief summary of the problem, how and when you collected the data you used to produce your Pareto chart. Your Pareto Chart that you can use for Pareto Analysis is now complete.
  13. Now, make up a ‘Pareto Decision Chart’ that you can use to clearly identify the ‘most important problem’ that must be corrected immediately.
  14. Use the same process to construct your Chart and the data for inclusion in your Chart is ‘Frequency of each defect or fault multiplied by the cost of each fault and converted to % of total costs’. 

Steps to Implement 80/20 Rule for Boosting Productivity

  1. Maintain a log of your tasks for a week.
  • Make a list of all your tasks/activities
  • Also, list the time that you would require to complete each task/activity
  • This list will help you get a true picture of your work week.
  1. Analyse the tasks:
  • Categorize your task int “High-priority” and “low-priority tasks.
  • High priority tasks are your core jobs, those that produce a return or where those which only you have the skills to perform and cannot be delegated.
  •  Low priority tasks are menial jobs that others can do on your behalf and hence can be delegated to support staff.
  • Keeping a tab on such non-productive activities will help you get rid of time wasted on such tasks that provide no return to your productivity.
  1. Delegate non-productive activities:
  • The next step is to delegate as many low priority tasks delegate as possible to others 
  • Make sure that you train your support staff, wherever training is required for completing the delegated task.
  • Avoid being tempted to do any unproductive activity as this will pull down your productivity.
  1. Calculate the time required for remaining low priority tasks
  • Now, calculate the time that you will spend on any remaining low priority task that you could not delegate.
  • This will help to schedule your tasks in such a manner that you can make maximum use of your productive time.
  • Do not spend a lot of time on such unproductive tasks nor spend much energy on them.
  • Try and divide such tasks into small chunks and set aside some specific time in a day or week to complete them.
  1. Priority your remaining tasks
  • Now turn your attention to tasks that are productive and bring the most reward.
  • Prioritize your tasks and concentrate most of your time on a few high-priority tasks.
  • This will help to maximize your productivity by concentrating on productive tasks and delegate those activities that have a low return.
  • Delegating these tasks will help reduce your stress and do less work for greater return.
  • So, you can implement the 80/20 Rule to achieve success in life, maximizing your productivity, better time management etc.

This article is brainchild of Mr. Pushpesh Pathak as he has not just used this principle but strongly recommends to all his clients. Hope our readers enjoyed reading this article and if and when you use this principle do not forget to write us about your experiences.