# Pareto Chart

The Pareto chart is based on the principle named after an Italian economist Vilfredo Pareto who observed that 80% of the land in Italy in the early 1900's was owned by 20% of the population. This "rule" of thumb has become a very common business rule and is often validated by data in every day business.

The Pareto principle is also referred to as the 80:20 rule. Typically as the "principle" states, you'll find that 80% of the defects of a process come from 20% of the causes or that 80% of sales come from 20% of customers etc. etc. etc.

## Pareto Charts

Pareto charts are simply descending bar graphs with a few other very insightful bits of information included.

**Sum or Count**: Depending on the program used, the descending bars on these charts will either be set on a scale that represents the total of all bars (Minitab) or set on a scale relative to the biggest bucket (SigmaXL)**Percent to Total**: Pareto's should also show the percentage that each individual bar is of the total**Cumulative Percentage**: Pareto's typically show the cumulative percentage of each additional bar in one or two ways, Minitab displays in the table below the bars and with a cumulative line that spans across the graphic and SigmaXL shows only a cumulative line

Let's look at two examples, we'll use the same exact data for both but we will use two different programs to generate the examples. The first will be a Minitab output and the second will be an output from SigmaXL.

### Pareto Charting - Minitab

The Pareto Chart displayed to the left shows hypothetically the number of defective products by team. You'll note that the blue bars are descending and that they are on a scale that peaks at 45 which is the sum of all defects for all teams.

Also take not of the table at the base of the graphic. The three rows display vital information for each of the "bars" they are under.

The data is count, percent of total and cumulative percentage. The cumulative percentage is the data that drives the red line spanning the graphic which is based on the right axis labeled percent.

### Pareto Charting - SigmaXL

With the same data as above, this next chart is generated with SigmaXL It depicts the same information in only a slightly different manner. The one lacking bit of information is the sum total of all defective product which Minitab creates by scaling the left axis to total where SigmaXL scales that axis based on the largest bar.

Although the table data offered by Minitab's output is missing, in SigmaXL we can infer the same information from the scales on either axis. For the most part, the same information is present and we can draw the same conclusions from either output.

The critical information being the descending nature of the bars showing us which team is producing more defectives and that 77% of the defective product is produced by two teams. This is a great way to depict which teams should be further evaluated for possible improvements.

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## Pareto Analysis

Performing Pareto analysis can be an insightful exercise if you have the data available to do so. Pareto Analysis is a fairly simple to perform, it an effective approach to root cause analysis.

Besides the valueable information provided by a single chart, Pareto Analysis takes the individual Pareto chart 2, 3, or four levels deeper by conducting what is called a "second level" or "third level" Pareto.

The example below is a three level Pareto analysis in which the second level is a Pareto chart that's a subset of the tallest bar on the first Pareto and the 3rd Pareto is a subset of the tallest bar of the 2nd Pareto.

With this approach we can sometimes "drill down" to find a single root cause of a problem that when addressed can solve a significant portion of our problem.

### First Level Pareto

### Second Level Pareto

### Third Level Pareto

After drilling down 3 levels we find that most of our defective product is coming from "Defective Dave" and if we can figure out what Dave might be doing differently and fix that problem then we can potentially solve 30% of our entire defective products problem (13/44).

Based on the simplicity of the Pareto principle we can derive Pareto charts and use the charts to conduct Pareto analysis which can sometimes lead us to a root cause. The power of the principal alone can be used in general business terms to aid in speedy decision making and developing sound strategies to resource allocation.