Quality Tool - Pareto Analysis

<p><strong>History</strong></p>

<p>Pareto Analysis gets its name from the Italian-born economist Vilfredo Pareto (1848-1923) who observed that a relative few people held the majority of wealth.</p>

<p>Dr Joseph Juran was the first to point out that what Pareto had observed, was a<em>&nbsp;universal</em>&nbsp;principle. More specifically, that in any group of factors contributing to a common effect, a relative few account for the bulk of the effect.</p>

<p>Further, Dr Juran coined the terms&nbsp;<em>vital few</em>&nbsp;and&nbsp;<em>useful many</em>&nbsp;to refer to those few contributions which account for the bulk of the effect; and to those many others which account for a smaller proportion of the effect.</p>

<p><strong>Examples</strong></p>

<p>As experienced managers and professionals, we intuitively recognize the Pareto principle and the concepts of&nbsp;<em>vital few</em>&nbsp;and&nbsp;<em>useful many</em>.</p>

<p>For example, we might observe that:</p>

<ul>
<li>Our top 15 % customers account for 70 % of our revenue</li>
<li>A few employees account for the majority of absenteeism</li>
<li>In a meeting, few people actively participate, while a majority are quiet</li>
<li>In a 20-step manufacturing process, 3 of the operations account for 50 % of the scrap generated</li>
<li>Of the 10 unique services that our hospital offers, 3 of the services account for 80 % of patient complaints.</li>
</ul>

<p><strong>Recommendation</strong></p>

<p>If the Pareto principle is so obvious and so simple, then what is all the fuss about it?</p>

<p>If we really understood the simple but profound Pareto principle, our first step, when faced with a flood of problems, would be to gather data and facts to identify the&nbsp;<em>vital few&nbsp;</em>problems. Refer&nbsp;<a href="http://sureshlulla.com/2020/10/07/quality-tool-data-collection/">Quality Capsule 014</a>.</p>

<p>Thereafter, we could then focus our attention and improvement efforts on those few things that would give us the greatest improvement in quality. Refer&nbsp;<a href="http://sureshlulla.com/2020/08/05/structured-quality-improvement/">Quality Capsule 005</a>.</p>

<p><strong>Pareto Diagram of Errors on Order Forms</strong></p>

<p><img alt="" src="http://sureshlulla.com/blog/wp-content/uploads/2020/10/Quality-Capsule_-Inside-Article-Diagram-015.png" /></p>

<ul>
<li>18 items on the order form are listed on the horizontal axis, in the order of their contribution to the total</li>
<li>The height of each bar relates to the left-vertical axis, and shows the number of errors detected on that item</li>
<li>The line graph corresponds to the right-vertical axis, and shows the cumulative-percent of total</li>
<li>Note how the slope of the line graph begins to flatten out, after the first four contributors (the&nbsp;<em>vital few</em>) account for 86 % of the total.</li>
</ul>

<p><strong>Insight</strong></p>

<p>Try converting the left-vertical axis to COPQ; and then observe how senior managers embrace quality improvement! Refer&nbsp;<a href="http://sureshlulla.com/2020/07/29/how-to-assess-cost-of-poor-quality/">Quality Capsule 004</a>.</p>

<p><strong>Next</strong></p>

<p>In my next edu-blog, on Wednesday 21 October, I will introduce Histograms, for univariate analysis.</p>

<p>Even as a stand-alone tool, a Histogram can lead to breakthroughs in purchasing departments, as well as key customer facing processes in hotels, hospitals, airports, etc.</p>

<p>Histograms also highlight COPQ.</p>