Pareto Principle, because it is not a perfect world

In a perfect world, every employee would put in the same effort, every product would be equally important, everyone would get equal opportunities at work and everyone would get a fair chance of promotion and salary hikes. The planning would be so easy, but that is not how it works.

It is not a perfect world

In any sales force, about 20% of the salesman usually bring about 80% of the new business. 20% of the customers give 80% business. In any company, about 20% of employees account for 80% of discipline problems.

20% of the items in the inventory list constitute 80% of the cost. 20% of the fast-moving items bring 80% revenue.

In a group-discussion, 20% of the participants make 80% of comments. In a classroom, 20% of students will take up 80% of the teacher’s time.

And therefore arise two important questions (1) Should we spend 80% of the time and efforts to get 20% results or should we spend valuable time on 20% tasks to get 80% results? (2) Which are these 20% tasks which will give us 80% results?

Pareto Principle

And, the answer is The Pareto Principle, named after an Italian economist-sociologist, states that the significant items in a group normally constitute a relatively small portion of the total items in the group. Sometimes it is also referred to as the concept of “Vital Few” and the ” Trivial Many “ or the “80-20 rule.”

The 80/20 rule observes that most things have an unequal distribution. Out of 5 things, perhaps 1 thing will be prominent. That prominent thing/idea/person will result in the majority of the impact.

Of course, this ratio can change. It could be 80/20, 90/10, or 90/20 (remember, the numbers don’t have to add to 100!).

The Pareto Principle helps you realise that the majority of results come from a minority of inputs.

Application of Pareto Principle

Each additional hour of effort by each extra worker adds nothing much to the final result. Economic actors devote each successive unit of the good or service towards less and less valued ends. This is called Diminishing Marginal Benefits in Economics.

The other areas where Pareto Principle can be applied are :-

  • A useful technique in time management – in work, business management, or personal time management.
  • Extremely helpful reference in business planning and project management.
  • Leadership is a lot easier and effective when Pareto principles are kept in mind.
  • Effective application in selling and marketing situations.
  • Used in quality management such as planning, decision making, six sigma, and performance management.
  • Helpful in bringing clarity to complex situations and problems, especially when deciding where to focus effort and resources.

Steps in Pareto Analysis

To understand various steps involved in Pareto Analysis, Let us take an example of a local restaurant. The restaurant is experiencing de-growth for the last two years Some of the complaints they receive from the clients are:-

  • Delay in taking orders.
  • Delay in serving food.
  • The food quality is not great.
  • The food prices are extremely high.
  • Unspecified taxes and charges.
  • Arrogant staff.
  • Tables not properly cleaned.

We have these categories under which the complaints are raised. Frequency is the parameter. If one particular category has got complain once, the frequency will be one. Every time a complaint gets raised under a category, the frequency count gets raised by one unit.

  1. Arrange the data in descending order of cause importance that is, the cause with the highest count first.
S.No.ComplaintsFrequency
1Delay in service39
2Delay in taking food order34
3Food quality not great20
4High Prices10
5Undefined charges7
6Arrogant Staff7
7Table not clean2

2. Calculate the cumulative count for each cause in descending order.

S.No.ComplaintsFrequencyCumulative Frequency
1Delay in service3939
2Delay in taking food order3473
3Food quality not great2093
4High Prices10103
5Undefined charges7110
6Arrogant Staff7117
7Table not clean2119

3. Calculate the cumulative count percentage for each cause in descending order. Percentage calculation: {Individual Cause Count} / {Total Causes Count}*100

S.No.ComplaintsFrequencyCumulative Frequency% Cumulative
1Delay in service393933%
2Delay in taking food order347361%
3Food quality not great209378%
4High Prices1010387%
5Undefined charges711092%
6Arrogant Staff711798%
7Table not clean2119100%

4. Create a vertical bar chart with causes on the x-axis and count (number of occurrences) on the y-axis.

5. Create a second y-axis with percentages descending in increments of 10 from 100% to 0%. Plot the cumulative count percentage of each cause on the x-axis.

Join the points to form a curve.

6. Draw a line at 80% on the y-axis running parallel to the x-axis. Then drop the line at the point of intersection with the curve on the x-axis. This point on the x-axis separates the important causes on the left (vital few) from the less important causes on the right (trivial many).

This Pareto diagram enables us to see which 20% of factors are important. In this case delay in service, delay in taking for order, and food quality are the vital few, and this where the efforts should be focussed to achieve the greatest improvement.

The value of the Pareto Principle is that it reminds us to focus on the 20% of things that matter. Of all the things we do 20% is crucial. That 20% produces 80% results.

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