Have you Ever into a new business environment where you are surrounded by lots of problems and having no idea of what to do? How to resolve them ? Then no need to distress yourself. Just by following this Pareto’s strategy you can solve all your concerns in simple and convenient manner. Before the brief description of pareto analysis lets have a discussion on by whom it is discovered and how it is evolved.
Pareto principle: Pareto term was evolved from a scientist named vilfredo Federico damaso pareto. He discovered this principle in early 20th century. This principle explains that 20 percent of the invested input is responsible for the 80 percent of the results obtained. This can also be defined as the (80:20 rule) that 80 percent of the problems are caused by 20 percent of causes states.
Pareto analysis: Pareto Analysis is a statistical technique in decision-making used for the selection of a limited number of tasks that produce significant overall effect. It uses the Pareto Principle (also known as the 80/20 rule) the idea that by doing 20% of the work you can generate 80% of the benefit of doing the entire job. Just to have a clear picture let us go through the step by step process involved in pareto analysis with an example.
Identify and list out problem:
- In the very first step you need to list all the problems you are facing and that needs to be solved. Try for all possible inputs from all the stake holders (i.e, talks with client, team members ,put on surveys to end users etc….)
Find out the root cause for each problem:
- For each problem identify the fundamental cause by using the techniques like brainstorming,5 whys, cost and effect analysis and root cause analysis.
- Now you need to score your problems. This scoring depends on type of problem you are trying to solve.
- If you are facing with customer satisfaction then score them on basis of number of complaints eliminated by solving the problem.
- If you are in loss and want profits then score problems on the basis of how much it costing you.
Categorize problems together by root cause:
- Group problems together by root cause.for example if 3 among 5 problems are from customer service panel put them in a same group.
Count all the scores for each group:
- Add all the scores for each cause group. Now the group with the top score is your highest priority.Then the group with lowest order is your lowest priority.
- Now you need to deal with high priority problems causing major damage to your business goals.
- Sometime low priority problems are not even worth to consider for the business.
Real time example for pareto analysis:
A major banking corporation is facing problems with opening credit card applications.so the want to investigate where the issues are arising. The data could be grouped into the following categories:No signature, address not valid, not good hand writing, already a customer and other problems etc….
Now for the following above scenario by applying pareto chart analysis:
1) Record the raw data. 2) Order the raw data
3) Determine the percentage that each category represents.
4) Now compare the present percentage and arrange them in descending order.
5) Draw a chart for by taking categories on X-axis and Frequency on Y-axis.
So, by observing the above chart banking corporation will come to know where exactly they need to be highly concentrated for the business growth. This is one of the example for pareto analysis.