Pareto Charts: a Key Data Analysis Tool

Author: Rob De La EspriellaBD3, CEO and Founder, BlueDragon IPS

The Pareto principle, also known as the 80/20 rule, was first observed by Italian economist Vilfredo Pareto in 1896. Mr. Pareto noticed that approximately 80% of the land in Italy was owned by 20% of the population. He later found that this 80/20 distribution applied to various other aspects of life, such as wealth and productivity.

In this blog, we discuss the importance of Pareto charts when analyzing quantifiable data. Also, how “weighted” Pareto charts are preferred over standard charts.  In addition, with large sets of data, how we can conduct multi-tiered Pareto Analysis.

Types of Pareto Charts

Pareto charts are basically frequency plots: they chart the number of occurrences of the causes of problems.  The most meaningful charts will show us how the majority of the effects come from a small number of causes. This blog discusses the two most common forms of Pareto charts, and multi-tiers Pareto Analysis.

  • Standard Pareto Charts
  • Weighted Pareto Charts (preferred)

Standard Pareto Charts

These are the normal charts most commonly used to analyze quantifiable data.  They are used to identify the most significant contributors or causes within a process, based on frequency alone. The bars on the chart represent the frequency of each category, with the tallest bars on the left. The left axis plots the frequency, and the right axis plots the cumulative percent contribution of each bar.

Weighted Pareto Charts

Weighted Pareto charts are the preferred method in BlueDragon IPS. Because they allow organizations to focus on tackling the most impactful issues first, not just those with the highest frequency.

These charts take into account not only the frequency but also the impact or importance of each category. By also taking into account the overall impact of the causes, we can assign weighting factors the categories.  Multiplying (frequency) x (weighting factor), we calculate a new number that gives us a more nuanced view of the data.

Multi-tiered Analysis of Pareto Charts

Based on the size of the overall data, we can conduct second, third and even fourth tier Pareto charts.

Once we construct the initial Pareto chart, we take the first bar and analyze the supporting data. We then create a second tier Pareto chart in the same way as the first, by categorizing the causal factors that contributed to this first bar.

We can repeat this process by further analyzing the first bar on the second tier Pareto chart.  The results are a third tier Pareto chart. If there is enough data, we can continue this process into a forth tier.

Constructing a Pareto Chart

Rather than a list of instructions, we recommend watching any number of free instructional videos on YouTube, or for advanced data analysts, take a paid course on Udemy.

  1. Introduction to Pareto Charts (https://www.youtube.com/watch?v=yfP8Ds-1XjI) (Lean Six Sigma) (FREE)
  2. How to Create A Pareto Chart Like A Pro in Excel | Pareto Principle Example (https://www.youtube.com/watch?v=mk1LvUGpvUc) (FREE)
  3. Pareto Analysis Masterclass: Pareto Specialist (Accredited) (on Udemy for $65)

Factors to Consider When Using Pareto Charts

Time Period Consideration

Pareto charts can cover different time periods, such as a work cycle, a full day, or a week. When deciding on the time period, consider the timeframe that will provide the most relevant and actionable data for your analysis. It is important to choose a time period that allows you to capture a representative sample of the data to make informed decisions.

Focusing on Significant Categories

Even though Pareto charts visually highlight the most significant categories in a process, it is vital to focus on analyzing and addressing these key areas first. By prioritizing the categories with the highest frequency and impact, you can maximize the effectiveness of your improvement efforts and see quicker results.  Using weighted Pareto charts will account for the fact that not all categories are equal in terms of their contribution to the overall issue.

Communicating Results with Stakeholders

You can leverage Pareto charts as powerful communication tools when sharing results with stakeholders. By presenting the data in a visual format that clearly shows the most critical categories, you can effectively convey the areas that require immediate attention. For instance, when discussing customer complaints, highlighting the top reasons for complaints using a Pareto chart can help stakeholders understand where to focus their efforts for improvement.

Advantages and Limitations of Using Pareto Charts

Advantages of Pareto Charts

Pareto analysis offers a clear visual representation of the most significant factors impacting a process, making it easier to prioritize improvements. By focusing on the vital few rather than the trivial many, organizations can efficiently allocate resources and address root causes effectively based on data-driven decision-making.

Limitations and Common Misconceptions

We must exercise caution when interpreting Pareto charts, as they can sometimes lead to oversimplification of complex issues. Common misconceptions include:

  • Assuming all factors contribute equally (a low number of causes may be more impactive than a large number of minor causes).
  • Overlooking potential interactions between different factors.
  • Underestimating the importance of addressing underlying root causes rather than just symptoms.

A deeper understanding of the context and nuances within the data is crucial to avoid misinterpretation and ensure that Pareto analysis is used as a valuable tool in driving continuous improvement initiatives.

Summary

Multi-tiered Pareto Analysis using weighted Pareto charts is a powerful tool for analyzing data. Weighted Pareto charts allows for a more comprehensive understanding of the factors contributing to a problem by visualizing the combined frequency and impact of problems in a process, allowing decision-makers to allocate resources more effectively and efficiently on addressing the most critical issues first, leading to improved problem-solving and better overall performance.

When used in conjunction with other quality tools, the Pareto chart can enhance problem-solving and decision-making processes, ultimately leading to improved outcomes and customer satisfaction.

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About the Author:

Rob De La EspriellaBD3, CEO and Founder, BlueDragon IPS

Deming Prize winning team member and pioneering Nuclear Quality Assurance expert Rob De La Espriella draws from four decades of experience in the commercial nuclear power sector and the nuclear weapons complex to offer deep insights into Root Cause Analysis and Total Quality Management. Rob is a leading expert in solving complex human-centric problems in our modern work environments. He has re-defined how organizations solve complex problems with the BlueDragon Integrated Problem-solving System (IPS).

© 2024 DLE Technical Services, LLC. All rights reserved.

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