Pareto Analysis : selecting the most important changes to
make. It is a very simple technique that helps you
to choose the most effective changes to make.
It uses the Pareto principle - the idea that by doing 20%
of work you can generate 80% of the advantage of doing the
entire job. Pareto analysis is a formal technique for
finding the changes that will give the biggest benefits.
It is useful where many possible courses of action are
competing for your attention.
How to use tool:
To start using the tool, write out a list of the changes
you could make. If you have a long list, group it into
Then score the items or groups. The scoring method you use
depends on the sort of problem you are trying to solve.
For example, if you are trying to improve profitability,
you would score options on the basis of the profit each
group might generate. If you are trying to improve
customer satisfaction, you might score on the basis of the
number of complaints eliminated by each change.
The first change to tackle is the one that has the highest
score. This one will give you the biggest benefit if you
solve it. The options with the lowest scores will probably
not even be worth bothering with - solving these problems
may cost you more than the solutions are worth.
Top 10 Business Uses of the 80/20 Principle
Strategy: Unless you
have used the 80/20 Principle to look carefully at the
different chunks of your business and to redirect your
strategy, it is almost inevitable that you are doing too
many things for too many people. "The principle is also of
enormous value in identifying the next leaps forward for
Quality: A small
percentage of quality characteristics contributes a
highest percentage of the quality loss. If you remedy the
most critical 20% of your quality gaps, you will realize
80% of benefits. 80% of customer complaints can be
eliminated by correcting only 20% of the causes.
Cost Reduction: "All
effective techniques to reduce cost use three 80/20
insights: simplification, through elimination of
unprofitable activity; focus, on a few key drivers of
improvement; and comparison of performance". Cost
reduction is an expensive business - concentrate 80% of
your effort at the areas (20% of the whole business) that
have the greatest cost-reduction potential.
should focus on providing a stunning service in 20% of the
existing products/services that generate 80% of fully
costed profits. It should devote extraordinary endeavor
towards retaining 20% of customers who provide 80% of the
Selling: "The key to
superior sales performance is to stop thinking averages
and start thinking 80/20". Hang on to the high-performing
salespersons, get everyone to adopt the methods that have
the highest input-output ratio. Focus every salesperson's
effort on the 20% of products that generate 80% of sales,
and on the 20% or customers who generate 80% of sales and
80% of profits.
The return on investment usually follows the 80/20 rule:
80% of the benefits will be found in the simplest 20% of
the system. Most software spends 80% of its time executing
only 20% of the available instructions.
Decision Taking & Analysis:
Gather 80% of the data and perform 80% of the relevant
analyses in the first 20% of time available.
Around 80% of stock only accounts for 20% of volume or
80% of the value of any project will come from 20% of its
Negotiation: 20% or
fewer of the points at issue will comprise over 80% of the
value of the disputed territory; 80% of the concessions
will occur in the last 20% of time available.
A manager has taken over a failing service centre He
commissions research to find out why customers think that
service is poor. He gets the following comments back from
Phones are only answered after many rings.
Staff seem distracted and under pressure.
Engineers do not appear to be well organized. They need
second visits to bring extra parts. This means that
customers have to take more holiday to be there a second
They do not know what time they will arrive. This means
that customers may have to be in all day for an engineer
Staff do not always seem to know what they are doing.
Sometimes when staff arrive, the customer finds that the
problem could have been solved over the phone.
The manager groups these problems together. He then scores
each group by the number of complaints, and orders the
Lack of staff training: items 5 and 6: 51 complaints
Too few staff: items 1, 2 and 4: 21 complaints
Poor organization and preparation: item 3: 2 complaints
By doing the Pareto analysis above, the manager can see
that the vast majority of problems (69%) can be solved by
improving staff skills. Once this is done, it may be worth
looking at increasing the number of staff. Alternatively,
as staff become better and start to solve problems over
the phone, maybe the need for new staff may decline.
It looks as if comments on poor organization and
preparation may be rare, and could be caused by problems
beyond the manager's control. By carrying out a Pareto
Analysis, the manager is able to focus on training as an
issue, rather than spreading effort over training, taking
on new staff, and possibly installing a new computer
Pareto Analysis is a simple technique that helps you to
identify the most important problem to solve.
To use it:
List the problems you face, or the options you have
Group options where they are facets of the same larger
Apply an appropriate score to each group
Work on the group with the highest score
Pareto analysis not only shows you the most important
problem to solve, it also gives you a score showing how
severe the problem is.