What Is A Pareto Chart? (And How To Construct One)

By Indeed Editorial Team

Published 4 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A Pareto chart is a graph that can generate data for business leaders, quality managers and production managers to optimise business and production processes. It is a useful tool for managers to identify frequently occurring problems and share complex information with management and stakeholders. If you work in quality management or process improvement, learning to create a Pareto chart can benefit you. In this article, we explain what a Pareto chart is, what its applications are and the different steps involved in creating one.

What is a Pareto chart?

The answer to the question, "What is a Pareto chart"' is that it is a cause-analysis tool and one of the seven basic tools for quality management. It is a graph that uses both bars and lines to represent data. The bar lengths represent the frequency or cost in terms of time and money. They usually are in descending order, where the longest bars are to the left and the shortest bars are to the right. The line represents a cumulative percentage of defects or problems. An Italian economist Vilfredo Pareto, known for developing concepts of efficiency, created the Pareto chart.

Related: Types Of Graphs And Charts

What are the principles of a Pareto chart?

The Pareto principle specifies that 80% of consequences come from 20% of the causes. It also asserts an unequal relationship between input and outcome. The other names of the Pareto principle are the Pareto rule or the 80/20 rule. For example, the Pareto principle can state that 20% of input creates 80% of the outcome, 20% of defects result in 80% of losses or that 20% of staff generates 80% of revenue. A business can interpret it using a Pareto chart to reward 20% of employees or remove 20% of defects for reducing losses and improving their processes.

What are the different steps involved in Pareto analysis?

If you want to create an impactful Pareto analysis, it is important to know the purpose of your chart. Once you have a clear goal, you can go through a systematic procedure to obtain the data for creating a graph. The different steps involved in creating and analysing a Pareto chart are:

  1. Identifying and listing the problems you want to resolve

  2. Identifying the root cause of each problem using five whys or root cause analysis tools

  3. Creating a score for each problem that you want to resolve

  4. Grouping problems together based on a common cause

  5. Acting on problems by resolving the problem with the highest score

Related: Top 10 Management Challenges And How To Overcome Them

How to construct a Pareto chart

Once you know what you want to analyse and have the data in hand, the task of preparing a Pareto chart is simple. You can use multiple online tools and software to track data and represent it in a Pareto chart. You can also create one on your own if you have access to correct data. Follow these steps to create a Pareto chart:

1. Determine your classifications

The first step in creating a Pareto graph is to decide on the classification of the graph and collect relevant data. Choose some categories or types of defects that you can measure. Make sure to choose categories that you can track through customer surveys. You can also choose categories to group certain items.

For example, when a customer returns a product, they may fill out a survey form citing the reason. The reasons on your survey are the categories you may choose for your Pareto chart and they may belong to seven categories, namely too big, too small, damaged, no longer needed, wrong item shipped, did not match the picture and did not like the product.

2. Decide upon time intervals

Choose a time interval for your data representation. This could be a week, month, year or normal production cycle. Find the total frequency of occurrence for each category you have chosen within the time. You may also choose to measure cost, time or another factor.

For example, after reviewing customer return surveys for the past month, you may have found that 15 customers returned jeans because they were too big, three because they were too small, five because they were damaged, four because it was no longer necessary, six because they received the wrong item, ten because it did not match the picture and two because they did not like it.

3. Collect and organise the data

Collect the relevant data and record the category each time. Assemble and organise pre-existing data. You may consider using tables or spreadsheets to organise your data. Place your data points for the frequencies of each type of defect in descending order from greatest to least. Add them up to get the total number of overall defects.

For example, the frequencies for each type of problem with the jeans in descending order is 15, 10, 6, 5, 4, 3 and 2. To find the total number of problems for the month, the equation is:

15 + 10 + 6 + 5 + 4 + 3 + 2 = 45

This allows you to gauge the overall magnitude of the issue you are facing.

Related: 10 Valuable Data Analysis Skills

4. Determine the cumulative percentages

To prepare your cumulative percentage data, take your first data point for the most common defect and divide it by the total number of defects. Multiply it by 100 to get your first percentage value. For the next data point, add it to the previous data point and then divide it by the total number of defects and multiply it by 100. Your next percentage is the sum of the first and second percentages. Repeat this process with the rest of the data points and with the last one, you reach 100%.

For example, the equation for the first percentage is:

(15/45) x 100 = 34%

To calculate the following cumulative percentages, take the next most common defect, add it to the first data point, divide it by the total and multiply it by 100. The equation is:

[(15+10)/45] x 100 = (25/45) x 100 = 56%

These are the following cumulative percentage equations:

[(15+10+6)/45] x 100 = (31/45) x 100 = 69% [(15+10+6+5)/45] x 100 = (36/45) x 100 = 80%
[(15+10+6+5+4)/45] x 100 = (40/45) x 100 = 89%
[(15+10+6+5+4+3)/45] x 100 = (43/45) x 100 = 96% [(15+10+6+5+4+3+2)/45] x 100 = (45/45) x 100 = 100%

5. Draw a bar graph

Write the label for each defect category in descending order from left to right on the horizontal axis. Number the vertical left side axis, starting from 0, in regular, round number intervals to a number slightly higher than your highest frequency data point. Now you are ready to draw your bar graph. Draw bars to correspond with each frequency total for each type of defect. For example, if your highest frequency data point is 15, you can number your left vertical axis from 1 to 16 in intervals of 1.

6. Draw a line graph

After drawing a bar graph, you can draw your cumulative percentage line graph. Label the right vertical axis with percentages, with 100% lining up with the highest frequency data point. Mark dots for each cumulative percentage value you found in step five. These can be in ascending order and eventually get to 100%. You can connect the dots to make a line graph.

How is a Pareto chart useful for businesses?

Pareto's initial purpose of creating a chart was to mark land and wealth distribution in Italy. In modern contexts, businesses use the Pareto principle in multiple business scenarios in human resources, education, healthcare, marketing, quality control and production. Some of the primary applications of a Pareto chart include:

  • Pricing products by comparing the impact of factors like sales volume, cost and profitability

  • Deciding on inventory and stock on the basis of consumption pattern charts

  • Prioritising suppliers in multiple categories based on cost and services

  • Identifying most common risks and hazards in accidents

  • Identifying common causes of complaints in customer service

  • Deciding which issue to sort first in case of multiple problems in a process

  • Categorising problems in a testing or quality assurance process

  • Analysing the impact of improvements using before-and-after scenarios

What are the benefits of using a Pareto chart?

A Pareto chart can benefit managers in the following situations:

  • Improving a product or process: Businesses can use this in the early stage of quality improvement. It can help them to allot dedicated resources to perfect their process.

  • Evaluating a product: If a business receives too much negative feedback, they can use a Pareto chart to evaluate a flaw in the design or performance. The chart can help a business quickly fix the problem to avoid further losses.

  • Resolving conflicts: Too many problems may lead to conflicts between multiple teams. Pareto charts identify the root cause of problems and help managers resolve conflicts.

  • Comparing issues: Manufacturers can compare different problems and identify the most impactful or loss-causing issues. Resolving the problems with the largest bar can improve productivity and reduce costs.

  • Sharing data: A Pareto chart is easy to understand and hence it is a useful tool for sharing information. Departments can tell management about various problems they face and management can respond quickly with solutions.

  • Solving the most prominent problems: Based on the 80-20 rule, a business, by resolving 20% of the more frequently occurring problems, may resolve 80% of the consequences. It can proportionately increase the profitability of the product or a process.

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