- slide 1 of 5
Pareto analysis, coined after Vilferdo Pareto – the economist who postulated this theory, uses statistical techniques to identify and analyze problems and find optimum solutions to them. Its uses in the business world are widespread – workforce management, project management, sales, inventories, production and quality control being the top areas where Pareto analysis is put to use for decision making and problem solving.
- slide 2 of 5
Pareto analysis, also commonly known as the Pareto 80:20 rule, suggests that 80% of the problems arise because of only 20% of the causes. Accordingly, identifying and resolving these 20% issues can theoretically lead to an 80% advantage in the overall performance. What’s crucial here is to clearly identify these 20% vital causes and to focus all the efforts on eliminating these causes, on priority.
Image Credit: cobrasoft (http://www.sxc.hu/photo/1133804)
- slide 3 of 5
Using Pareto Analysis for Problem Solving in Projects
Pareto analysis can be effectively used to solve problems of any type and has thus gained immense acceptance in the field of project management, where problems erupt ever too often. Dealing with just the key 20% causes, which are acting as a stumbling block in the path of the project, can result in greater probability of overall success. Also, there is an increased likelihood of the remaining 20% of the problems, caused by 80% causes, reconciling on their own - if these problems are correlated to one or more of the key causes. Essentially, Pareto analysis targets a limited selection of problems which have a significant effect on the progress of the project. It is a creative technique of analyzing the causes of problems, by stimulating the thought process to identify repeated problem patterns that interfere with the work progress of a project. Here is a step by step approach to problem solving with Pareto analysis.
- Write down in crisp terms the problem, that requires investigation. For instance, “Determining the causes for delay in the project." It’s important to be clear of the exact problem that is to be addressed. If the project is facing two or more problems, they should all be analyzed individually.
- The next step is to identify all the possible causes that could be leading to the problem. As in case of delay in the project the possible causes can be “shortage of resources", “technical failures", “environmental factors", “inefficiency or shortage of workforce" or “government approvals".
- Having identified the probable causes for the problem, the next step involves assigning a frequency of occurrence to each cause. For this the historical data from related projects may be used. For instance, continuing with the same example, you need to count the number of times causes, like “technical failure" or “shortage of resources", have delayed similar projects in the past. When each of the causative factors has been assigned a count, it will make the analysis easier if the counts are reorganized in a descending order and are converted into percentages, based on the total number of projects that were included in the study.
- Even at this stage, with the causes represented in percentage form, it is easy to interpret which are the main 20% causes, leading to a delay in the project. However, for better identification of the vital causes of a problem, a graphical Pareto chart can be plotted, using Excel spreadsheets. Here, a cumulative frequency line can also be drawn to get a clear view of the situation.
- slide 4 of 5
Doing a Pareto Analysis Using Excel Spreadsheets
Making Pareto charts using Excel spreadsheets is the best way to carry out a Pareto analysis for problem solving in projects. A graphical representation of the analysis provides a more powerful tool, which is easily comprehensible as well, to identify the relative importance of all the enlisted causes, and come to a final decision on what are the few key causes significantly affecting the project. Here’s how Pareto Analysis data can be pictorially presented to identify the vital 20% causes that need to be taken care of to bring about an 80% overall improvement.
- Make a list of all the probable causes in one column and in the adjacent column fill in the frequency of occurrence, in percentage form, for each of the causes. Sort the data, based on the frequency of occurrence, in a descending order.
- In the next, adjacent column calculate the cumulative frequency of occurrence, which by default will appear in percentages.
- Finally, make a bar graph using the data, plotting the frequency along the y-axis and the causes along the x-axis. The cumulative frequency can be represented as a line. The resulting bar chart will make it clear what are the key causes resulting in 80% of the problem related to the project.
Screenshots taken by Sidharth Thakur
- slide 5 of 5
Pareto Analysis Can be Used Universally
The Pareto problem solving technique is an extremely powerful tool, which is simple to use yet very effective in finding solutions to problems. Although the technique is mostly based on finding the 20% vital causes that lead to 80% of the problems, it can still be effectively used in situations where the 80:20 rules does not apply clearly. The main objective of this approach to problem solving is to identify the chief causes and respond to them immediately, so as to improve the overall output of a project. While, in this article we have concentrated mainly on how can Pareto analysis be used on a problem solving project, today’s managers have been using it for decision making as well as problem solving in other spheres of business too.
Problem Solving for Projects with Pareto Analysis
Looking for tips on how to perform a Pareto analysis or how to create a Pareto chart in Excel? Check out some of the other articles in our Pareto series.