__What is Pareto chart__

Learn how to create different types Pareto chart with very simple examples using excel. You will also learn, how to interpret Pareto chart.

Pareto charts are used to prioritize problems (or opportunities) so that the major problems (or opportunities) can be identified.

Pareto analysis also known as 80/20 rule is one of the most widely used and simple tool to prioritize opportunities in problem solving. Learn step by step, how to create Pareto in Excel and how to interpret the graph. It is used to separate the most important causes of a problem from the trivial many. This principle states that 80% of the impact of the problem will come because of 20% of the causes. Developed by Vilfredo Pareto, an Italian Economist, and also called as Pareto 80/20 Rule.

__Principle:__

- 80% of the problems are due to 20% of causes
- Vital few Trivial many

__History of Pareto Chart:__

The word Pareto comes from Vilfredo Pareto(1848-1923). There is a very interesting story behind the discovery of this chart.

Pareto was born in Paris after his family had fled from Italy, in search of more political freedom. Pareto was tasked to study unequal distribution of wealth in the country.

Pareto an economist made extensive studies about the unequal distribution of wealth and formulated mathematical model to quantify this maldistribution.

During 1940’s Dr. M Juran, world renowned leader in the quality field applied the principle of “vital few” and “trivial many” as a universal principle not restricted to income and wealth.

He needed a small name to apply to the phenomenon of the “vital few” and “trivial many”. He depicted some cumulative curves in his book and put a header as “Pareto’s principle of unequal distribution”.

__Pareto diagrams are used to :__

__Analyze a problem from a new perspective –__ Pareto chart gives a simple and more structured perspective in problem solving. This is very useful and holds true in most of the scenarios and industries.

__Focus attention on problems in priority order –__ Whenever we encounter any problem or analyze defects, it is always advised to focus on problems which are vital and more critical. Pareto chart helps us in doing just that, prioritizing problems or defects to be addressed.

__Compare data changes during different time periods –__ Pareto charts are used to compare similar data of different time periods to check if there is any change in top defects or defect reasons. At times, top reasons change or their impact changes.

__Provide a basis for the construction of a cumulative line – __The basic principle of Pareto chart is to show the cumulative impact of different parameters, defects etc. While individual impact may show less but when we combine and show the cumulative impact of top causes/defects, we can see the much bigger combined impact.

**What is Pareto Principle**

**Purpose**

To arrange data so that the few vital factors that are causing most of the problems reveal themselves. Concentrating improvement efforts on these few will have a greater impact and be more cost-effective than undirected efforts. It has a very wide variety of use in all type of industries or functions. Pareto primarily works on defects and count data, it will help you to identify the top causes/issues which are generating the maximum defects.

__Pareto chart using Excel__

Pareto analysis is very useful in assisting management with the selection of the more important and impactful problems or defect areas, this helps us in directing corrective action resources at right places.

Making Pareto chart using MS Excel is very simple, but you need to understand the concept and know few steps. I can assure that you will find it very easy and you will be using it very soon in your daily work life.

So lets start, in step 1 just create the list of causes or defects with their frequency in an excel table. We have taken example of customer complaint calls at a contact center. Sample of 300 calls were audited on 12 parameters as listed in the table, number of defects observed are listed under “CSQ Parameters”.

Please make a note of step 2, you have to sort the data in descending order. Many people miss this step and then their Pareto chart doesn’t look like a Pareto chart.

In step 3, we need to add one column for proportion/percent contribution for each defect type. After this we have to add one column for cumulative proportion. Cumulative proportion shows the combined impact of parameters added.

Calculation cumulative proportion is very easy, just check the below table and explanation. First row will have the same value as “Proportion” column, then apply formula from second row as shown below.

In the current version of Excel 2016, we get the option of Pareto and it has become very easy. Now in step 5, just select the first, 2nd column along with the “cumulative” column, then go to “Recommended Charts” under “Insert” option. You will see the Pareto Chart option there and just select that as shown below.

Cumulative lines are convenient for answering such questions as “what defect classes constitute 70% of all defects?”. “First thing first” is the thought behind the Pareto chart. As you can see in the above diagram, we have prioritized the defects to work upon.

Our attention is focused on problems in priority order. This simple ordering of data may suggest something of importance that would otherwise have gone unnoticed.

__Weighted Pareto Analysis__

Pareto analysis is very useful in assisting management with the selection of the more important and impactful problems, this helps us in directing corrective action resources at right places.

Pareto method assumes that there will be segregation of the significant few from trivial many. But, while constructing Pareto chart we don’t consider the criticality of different types of defects. The Pareto chart is constructed based on the frequency of event/defect occurrence only.

However, criticality (potential safety, customer satisfaction or economic) factors might result in a different Pareto alignment or ranking. So, in Weighted Pareto we try to address this issue.

As you can see, after applying weight the proportion or the impact of defect type 5 and 8 changes significantly.

Now when we apply Step 4,5 & 6 to create Pareto chart, the chart will have different “vital few” defect types as compared to the earlier chart that we had created.

I hope you have understood the above concept and if you want to learn more such tools then go for a Six Sigma course from Simplilearn. The course is aligned to IASSC and ASQ exam, integrates lean and DMAIC methodologies using case studies and real-life examples.

There is another good online Six Sigma Green Belt course from Coursera. This course is from University System of Georgia and is well recognized.

If you want to learn new age data science techniques, then one good starting point is Data Science course from Simplilearn. Data Science is emerging very fast and early movers will always have advantage.

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