PARETOANALYSIS

Madeby: M.Hamza
Submitted to: Sir Maqboolur Rehman
Course: AdvanceManagerial Accounting

Definition
Pareto Analysisis a statistical technique in
decision-making used for the selection of a limited
number of tasks that produce significant overall
effect. It uses theParetoPrinciple (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.

Pareto Analysis is a simple technique for prioritizing

possible changes by identifying the problems that will
be resolved by making these changes. By using this
approach, you can prioritize the individual changes
that will most improve the situation.

Thistechniquehelpstoidentifythetop
20% ofcausesthat needstobeaddressed
toresolvethe 80% oftheproblems.

ThevalueoftheParetoPrincipleforaprojectmanageristhat
itremindsyoutofocus onthe 20% ofthings thatmatter. Of
thethings youdoduringyourproject, only 20% arereally
important. Those 20% produce 80% ofyourresults. Identify
andfocus onthosethings frst, butdon'ttotallyignorethe
remaining 80% ofcauses.

HistoryofParetoAnalysis
TheParetoefectisnamedafterVilfredoPareto, aneconomistand
sociologistwholivedfrom 1848 to 1923.

Thismethodstemsinthefrstplacefrom Paretossuggestionofa curveofthe

distributionofwealthinabookof 1896. Whateverthesource, thephraseof
thevitalfewandthetrivialmanydeservesaplaceineverymanagers
thinking. Itisitselfoneofthemostvitalconceptsinmodernmanagement.
TheresultsofthinkingalongParetolinesareimmense.

?HOWTOUSEIT

Step 1: IdentifyandListProblems
Step 2: IdentifytheRootCauseofEachProblem
Step 3: ScoreProblems
Step 4: GroupProblemsTogetherByRoot Cause
Step 5: Addup theScoresforEachGroup

Step 6: TakeAction

TheParetoChart
AParetochartisa
graphicalrepresentation
that displaysdatainorder
ofpriority.

Thisisasimpleexample of a Paretodiagramusingsample data

showingthe relative frequencyof causesforerrorson websites. It
enablesyoutosee what 20% of casesare causing 80% of the
problemsand where efortsshouldbe focusedtoachieve the
greatest improvement.

SomeProblems
Difculties associatedwith pareto analysis

Misrepresentationofthedata.
Inappropriatemeasurementsdepicted.
Lack ofunderstandingofhowitshouldbeappliedtoparticularproblems.
KnowingwhenandhowtouseParetoAnalysis.
Inaccurateplottingofcumulativepercentdata.

Overcomingthedifculties
. Defnethepurposeofusingthetool
. Identifythemostappropriatemeasurementparameters
.Usecheck sheets tocollectdataforthelikelymajorcauses
Arrangethedataindescending orderofvalueand
.calculate % frequencyand/orcostandcumulativepercent
Plotthecumulativepercentthroughthetoprightsideof
. thefrstbar
Carefullyscrutinizetheresults. Hastheexerciseclarifed
?thesituation

ParetoAnalysisExample
Ahmet hastakenoverafailingservicecenter, withalotofproblemsthat
needresolving. Hisobjectiveistoincreaseoverallcustomersatisfaction.
Hedecidestoscoreeachproblembythenumberofcomplaintsthatthe
centerhasreceivedforeachone.

Problem
(Step 1 )

Cause (Step Score (Step

2)
3)

Phones arent
answeredquickly
enough.

Too few service

center staf.

Stafseem
distracted and
under pressure.

Too few service

center staf.

Engineersdont
appear to bewell
organized.They
needsecondvisits
to bring extra
parts.

Poor organization
andpreparation.

15
6
4

Engineers dont
know what time
theyll arrive.This
Poor organization
means that
customers may have andpreparation.
to bein all day for an
engineer to visit.

Servicecenter staf
dont always seemto
know what theyre
Lack of training.
doing.

30

When engineers
visit,thecustomer
the customer
fnds that the
problem couldhave
been solvedover the
phone.

Lack of training.

21

Ahmetthengroupsproblemstogether (steps 4 and 5). Hescoreseach

groupbythenumberofcomplaints, andordersthelistasfollows:
1.
Lackoftraining (items 5 and 6) 51 complaints.
2. Toofewservicecenterstaf (items 1 and 42) 21 complaints.
3. Poororganizationandpreparation (items 3 and 4) 6 complaints

Figure 1. AhmetsPareto Analysis

Itisthedisciplineoforganizingthedatathatiscentraltothesuccessofusing
ParetoAnalysis. Oncecalculatedanddisplayedgraphically, it becomesa
sellingtooltotheimprovementteamandmanagement, raisingthe
question whytheteamisfocusingitsenergiesoncertainaspectsofthe
problem.

Six Sigma Example