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Pareto Analysis and Pareto Principle (also known as the 80/20 rule) involve the use of the Pareto Distribution, which is graphically reprinted by a Pareto Chart. The Pareto Distribution is the foundation of the Pareto Principle. In this article, you will read:
- Pareto Distribution – An Overview
- Pareto Distribution – An Example
- Pareto Distribution – Applications
Pareto Distribution is graphically illustrated by a Pareto Chart, as shown below.
The Pareto Chart shows the Probability Density (depicted by the blue line) and the Distribution Function (depicted by the red line). The probability density is the probability of the occurrence of a variable. If you aren’t mathematically inclined then these graphs wouldn’t make too much sense. Let’s take a basic example to understand Pareto Distribution.
Suppose you are in the Project Management Office (PMO) of an organization and are responsible for increasing the probability of completing current projects, which are in progress, on schedule. You start by analyzing past projects and realize that there are some common causes of a project coming in late. These causes and the occurrence percentage are as follows:
- Negative risk was identified but not mitigated correctly – 50 %
- Scope creep – 30 %
- Critical Path was changing too often – 10 %
- Client response delays – 5 %
Every other cause was below 5 %. Pareto Distribution for such data will look like the image shown below.
By using the Pareto Distribution and the Pareto Principle, you can make key decisions. In this example, by getting clients to respond promptly, the impact on current project schedules will not be too great. However, if you work on training project managers to respond to negative risks (50 percent) and manage scope creep (30 percent) more effectively, then there would be a drastic improvement in reducing the number of delayed projects.
As you can see from this example, the Pareto Distribution is extremely useful in the fields of Continuous Improvement and Value Engineering.
By using the Pareto Distribution, business processes and efficiencies can be greatly improved. For example, in business the Pareto Distribution can be used for:
- Reducing Customer Complaints
- Reducing Organizational or Systems Problems
- Implementing Six Sigma Processes
Apart from business applications, the Pareto Distribution or the Pareto Principle is useful in your personal life. For example, you can use it for:
- Improving Financial Planning: How to Use the Pareto Principle in Personal Finance Planning
- Improving Personal Time Management: Record the time you take for daily activities and then create a Pareto Distribution or Pareto Chart. Then, by performing a Pareto Analysis, you will be able to tell where most of your time is going. If, for example, the Pareto Analysis shows that you are spending most of your time in transit to work, then you may want to consider working from home as an option. To learn how to create a Pareto Distribution or a Pareto Chart, refer to the Creating Pareto Charts with Microsoft Excel 2007 article.