The Powerful Pareto Principle

Written by Nathanial Marshall, Senior Consultant at Lauras International.

Imagine that you’ve just stepped into a new role. Unsurprisingly, you’ve inherited a whole host of problems that need your attention, but how do you decide which problems you need to deal with first…?

Lauras International recommends using the Pareto Principle to target your top losses.

The Pareto Principle, or ’80-20 Rule’ is one of the simplest and most powerful management tools available. It is a simple technique that is extremely helpful in bringing quick and easy clarity to complex situations and problems, especially when deciding where to focus effort and resources.

Pareto’s Principle is named after the man who first discovered and described the ’80-20′ phenomenon, Vilfredo Pareto (1848-1923), an Italian economist and sociologist. An academic, Pareto was fascinated by social and political statistics and trends, and the mathematical interpretation of socio-economic systems.

He first observed the ’80-20′ principle when researching and analysing wealth and income distribution trends in nineteenth-century England. Pareto noted that broadly 20 percent of the people owned 80 percent of the wealth.

While the very first application of the Pareto Principle was originally in Pareto’s suggestion that “Eighty percent of the wealth is held by twenty percent of the people,” the principle was and can be extended to apply to almost all other distribution scenarios as well.

The Pareto Principle (at a simple level) suggests that where two related data sets or groups exist (typically cause and effect, or input and output), they often show certain behaviour. For example:

  • “80% of output is produced by 20 percent of input”
  • “80% of outcomes are from 20 percent of causes”
  • “80% of the downtime comes from 20 percent of problems”
  • “80% of a company’s profits come from 20% of its customers”
  • “80% of a company’s complaints come from 20% of its customers”

So how would you apply the Pareto Principle in your area?

There are 7 key steps to analysing a problem using the Pareto Principle:

  1. Identify the area/subject/problem you want to breakdown and prioritise
  2. Create a set of criteria you want to measure this against
  3. Collect data
  4. Analyse the data for each set of criteria
  5. Create a bar chart for each set of criteria
  6. Look for the Pareto effect
  7. Resolve the issue using Problem Solving Tools.

Example – Downtime Reduction:

Pareto

This demonstrates a perfect Pareto effect that 80% of downtime (800 of 1000 mins) is caused by 4 reason codes (4/20 reason codes=20%). By prioritising and reducing downtime in these areas, you will make the biggest difference.

 

For more detail about the 7 steps, or if you’d like help deciding where to focus Continuous Improvement effort and resources to target your top losses – then please get in touch.

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