Pareto
Pareto chart is a type of diagram that contains both bars and a line graph, where individual values are represented in descending order by bars, and the cumulative total is represented by the line. The purpose of Pareto chart is to highlight the most important factors from a set of data and to allow prioritization.
The name is coming from Vilfredo Pareto, an Italian economist who studied the distribution of wealth in different countries. He concluded that 80% of income in Italy was received by 20% of the Italian population. The same distribution was observed in other areas and was called Pareto effect. Pareto principle is a prediction that 80% of effects come from 20% of causes.
The Pareto principle follows a mathematical power law distribution (xn).
For a Pareto Chart the left vertical axis is the frequency and the right vertical axis is the cumulative. (See Chart). To take the example below, in order to lower the amount of defects by 87.7%, it is sufficient to solve the first three issues: Weight deviation, Air bubble and Color.
In quality control, this chart it often represents the most common sources of defects, the highest occurring type of defect, or the most frequent reasons for customer complaints, and so on.
The principle's use has since expanded to other areas in business. For example, in sales, it is said that 20% of customers are responsible for 80% of sales. Thus, it makes sense to focus on those 20% of customers. The 80-20 rule has many applications, including finance.
Examples:
- 20% of defects in production could be found to cause 80% of problems;
- 80% in the lower-risk investment will collect a reasonable return, while the 20% in the higher-risk assets will achieve a greater growth;
- 20 % of employees are responsible for 80 % of a company’s output;
- 80% of work is completed by 20% of your team;
- 20% of your time produces 80% of your results.
MINITAB is helping us to build Pareto Chart very easy.
Pareto Chart is one of the seven basic tools of quality control.
