PROBLEM SOLVING TOOLS: PARETO DIAGRAM

PROBLEM SOLVING EDUCATION SERIES-PART 7

INTRODUCTION

The Pareto diagram is a graphical tool for ranking quality issues and ideas from most significant to less significant. It was named after Vilfredo Pareto ( 1848 ~ 1923) who found that 80% of wealth in Italy was held by 20% of the people. Pareto diagram is also called 80-20 rule.
In 1950, Dr Joseph Juran, an acknowledged quality guru, notices that 80% of quality failures comes from 20% of problems.  He is remembered for the phrase vital few and useful many.

PARETO 80-20 RULE

It shall be established here, that 80/20 ratio does not always comes close. But, the basic concept applies to many business cases:
• 20% of the sales reps generate 80% of total sales.
• 20% of customers account for 80% of total profits.
. 20% defects can account for 80% of quality failure. 
• 20% of patients account for 80% of healthcare spending (and 5% of patients account for a full 50% of all expenditures!)

PARETO DIAGRAM

A pareto diagram is a series of vertical bars lined up in a descending order from high to low.

From the chart above, working on defect 3 and 5, will bring much improvement in quality performance.

CONSTRUCTING A PARETO DIAGRAM

1. Decide categories you will use to group items. In relation to problem solving, this will relate directly to the problem chosen. You may also have collected data using check sheet.
​2. Decide what measurement is appropriate. Common measurements are frequency, quantity, cost and time. 
3. Decide what period of time the chart will cover: One work cycle? One full day? A week?
4. Collect the data using prepared check sheet.
5. Subtotal for each category.
6. Determine the appropriate scale for the measurements. The maximum value will be the largest subtotal from step 5. Mark the scale on the left side of the chart.
7. Construct and label bars for each category. Place the tallest at the far left, then followed by next tallest. 
8. Calculate the percentage for each category: the subtotal for that category divided by the total for all categories. Draw a right vertical axis and label it with percentages. Ensure both scales in the left and right matches.
9. Calculate and draw a cumulative sums: Add the subtotals for the first and second categories, and place a dot above the second bar indicating that sum To that sum, add the subtotal for the third category, and place a dot above the third bar. Continue the process for all bars. Connect the dots, starting from the top of the first bar.
10. The last dot should reach 100% on the right scale.

USE MS EXCEL

​Once you are comfortable doing manually, you can use MS Excel to generate the pareto chart. I will strongly suggest to develop the chart manually first understand its construction
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