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  • Writer's pictureSedat Onat

Pareto Analysis / ABC Analysis

Updated: Aug 30, 2023

“You cannot overestimate the unimportance of practically everything.” (John C. Maxwell)


When we know that every decision in our life does not have the same payoff, every minute has the same importance, and not every person has the same value, we cannot discuss a general 1/1 balance.

The 80-20 Rule;

Vilfredo Pareto, an Italian-born civil engineer from a middle-class family (1848 France-Paris – 1923 Switzerland-Genoa), in research he conducted in 1897 on income inequality observed;

  • According to a source, In England, 80% of the economy is controlled by 20% of the people [2],

  • According to another source, 80% of the land in Italy belongs to 20% of the people,

  • 20% of the peas in the garden give 80% of the crop,

He discovers that there can be a mathematical link between the "significant minority" and the "insignificant majority." And he publishes this work in his article "Cours d'Economie Politique" [3].

His article received little attention for a long time.

In 1907, the American economist Max Otto Lorenz supported the income imbalance with the Lorenz Chart, which bears his name, and provided a visual understanding of the analysis.

In 1950, Joseph Moses Juran created the mathematical model of the 80-20 rule with the logic of "Separating the vital few from the trivial many". Joseph Duran personally names the model Pareto and applies this model to the Supply Chain.

  • The Vital Few / The Skilled Minority: Few resources explaining much of the problem

  • The Useful Many: A massive amount of resources explaining a small part of the problem.

Based on the principle that every event does not have an equal effect, the Pareto model was noticed by the world after the 2nd world War (I could not find the reason).

Although the 80-20 Rule, which argues that the unbalanced ratio between causes and effects is inevitable, was later differentiated by 64-4 (Richard Koch and Perry Marshall's comments) or 50-1 rules, the general trend is concentrated around 80-20.

The Pareto chart is also one of the 7 Basic Tools of Quality Control [5].


The Pareto rule, which ensures that the causes of a problem are ranked in order of importance, is divided into three groups;

1. Group A: 80% of the results, 20% of the causes

2. Group B: 15% of the results, 30% of the causes

3. Group C: 5% of the results, 50% of the causes


Application

Steps;

1. The problem or purpose is determined.

2. Root causes are listed. Tools to be used;

3. The criterion to be measured is determined by SMART logic;

  • Specific

  • Measurable

  • Assignable

  • Realistic

  • Time-Related

4. The unit of measurement is determined [7].

5. The measurement period is determined (Time, block, etc.) [8].

6. Data are collected carefully by creating a checklist [9].

7. Ensure that enough data is available.

8. Those with a high standard deviation [10] are eliminated.

9. Items close to each other are grouped under categories [7].

10. Analysis is done with the help of applications such as Excel [11] or Minitab [12] / [13].

11. A graphic should support the analysis, giving a clearer photograph at first glance.

12. It is evaluated whether the analysis effectively solves the problem by drawing a meaningful conclusion (Brainstorming).

13. Decisions to be taken are determined and implemented [11].

Frequently used fields

  • Time and cost efficiency improvement projects,

  • Supplier segmentation,

  • Prioritization of strategies.

Matters needing attention

- Historical data

Since historical data is taken, the effects of recent updates/innovations may not be visible. For this reason, it should be ensured that the correct range is taken [14].

- Fixed 80-20 implementation

It is a symbolic value of 80-20 in terms of the overall average. Pareto does not necessarily have to be 80-20 or give a total of 100. The aim is to grasp the absence of symmetry and clearly distinguish between the insignificant majority and the qualified few. While 90-10 or 70-30 when appropriate, Pareto's Pareto (Repeated / Multilevel) can be taken in necessary cases (For example: 64-4, 51-1) )


- Considering that it would be more beneficial to apply repeated Pareto / Multilevel Pareto

A more valid point will likely be reached due to the repeated application of the Pareto process. But, if it is continued repeatedly, the effect goes up to zero. For this reason, the process leading to the root problem should be looked at rather than the number. It is necessary to stand where it is thought that the correct answer has been taken.

- Considering 80 in 80-20 as garbage

The Pareto rule paints us a picture. It is not correct to eliminate the unnecessary ones in this picture. For example, talking on the phone about efficient time management takes place 80%, but we may need to talk on the phone to do our work. For this reason, it would not be right to make a clear distinction.


- Don't focus on the wrong spot

The weight of more significant figures than leveraged expenditures in Kraljic Portfolio Analysis [15] can lead to misinterpretation.


- Focus on Quantity only

Since calculating all of the returns in business and private life quantitatively may lead to erroneous results, it is also necessary to question their quality.

  • Packaging

  • Feedback

  • Timely delivery

  • Etc.

- Thinking that it applies to everything

It should not be thought that Pareto can be used in every subject. For example, sending e-mails is 80% of efficient time management, but we may need to send e-mails.


- Assuming the root problem is found

Pareto gives a general framework, not a definitive result. It is the user himself who will comment on the picture in this frame.


The difficulties encountered

  • Measurement technology of data [9].

  • Lack of understanding of how products should be stored [9].

  • To decide when and how [9].

  • Some parts of the Pareto Chart come out flat. These categories need to be re-evaluated.

  • In repetitive lists, the need for additional module support to the program or existing program is fed from a constantly updated resource set.

Advantages

  • It allows you to eliminate long lists of problems and focus on the main points (Justin Harris).

  • Like cost-based problems, quantitation can yield quick results.

  • Because of the content of the most crucial cause of the problem, it also becomes common to reveal the consequences. Small parts are also separated.

  • Autopsying problems, is a helpful tool in limiting access to errors and thus in preventive use.

  • Processes can be examined with the analysis carried out at regular intervals (Before-After analysis).

  • It allows you to avoid long KPI lists and focus on what matters.

  • Percentages of problems can be easily calculated.

  • Compromise becomes easier, thanks to the fact that it reveals a mathematical result.

  • It saves time and money by shifting the energy to the right points. "Time manages itself if you focus on the most important things (Richard Koch)."

  • In the process of this procedure, it creates a management that will be worked on and authorized, and problems are identified.

  • It helps to create a dynamic list of goals in regular assessments.


Opposing views

The most interesting opposite view of the Queen of Pareto is that Benito Mussolini, a younger student in 1904, was influenced by Vilfredo Pareto's lectures at the University of Lausanne and turned away from the first Socialism to Elitism during the years he was the leader of Italy. As a result, the right decision was made for the Totalitarian regime.

Some real-life paintings

  • We are likely to see the Pareto principle in many different areas of life;

  • 80% of world energy production is consumed by 8% of the country [16].

  • 80% of Nobel prizes are won by 16% of countries [17].

  • In 2002, Microsoft stated it could prevent 80% of system crashes by solving 20% of the most reported bugs [18].

  • Factories employ 23% of the working groups [19].

  • Warren Buffet owes 90% of his fortune to 10 investments [20].


How to make a Pareto chart in Excel?

 

References

  • [1] "Pareto Principle," [Online]. Available: https://marketbusinessnews.com/financial-glossary/pareto-principle/. [Accessed 02 2020].

  • [2] "Vilfredo Pareto," [Online]. Available: https://en.wikipedia.org/wiki/Vilfredo_Pareto.

  • [3] V. Pareto, "The New Theories of Economics," vol. 1, no. 1, 1897.

  • [4] «Pareto,» [Çevrimiçi]. Available: https://onedio.com/haber/garip-bir-sekilde-yasamin-her-alanina-sirayet-eden-ilginc-prensip-pareto-ilkesi-704658. [Erişildi: 02 2020].

  • [5] "7 Basic tools of quality," [Online]. Available: https://en.wikipedia.org/wiki/Seven_basic_tools_of_quality.

  • [6] S. Onat, «Kalite Kontrol,» 28 04 2016. [Çevrimiçi]. Available: https://www.sedatonat.com/post/kalite-kontrol. [Erişildi: 29 08 2020].

  • [7] E. Canpolat, «Pareto Analizi Nedir?,» Cilt %1 / %2-, no. -, 2019.

  • [8] S. Alamehmet, «Pareto Analizi / Blogcu,» [Çevrimiçi]. Available: http://enm.blogcu.com/pareto-analizi/9375819. [Erişildi: 02 02 2020].

  • [9] G. Briscoe, "Pareto Analysis (the 80:20 rule)," [Online]. Available: https://www.managers-net.com/paretoanalysis.html. [Accessed 02 2020].

  • [10] "Standart Sapma," [Online]. Available: https://tr.wikipedia.org/wiki/Standart_sapma. [Accessed 29 08 2020].

  • [11] U. Erdemir, «Pareto Analizi,» [Çevrimiçi]. Available: http://paretoanalizi.blogspot.com/. [Erişildi: 2 February 2020].

  • [12] M. Parker, "How to Run a Pareto Chart in Minitab," [Online]. Available: https://www.leansigmacorporation.com/how-to-run-pareto-chart-in-minitab/. [Accessed 02 02 2020].

  • [13] D. Doğan, «Minitab Eğitimleri / Pareto Analizi,» [Çevrimiçi]. Available: https://duygudogan.wordpress.com/2018/10/13/minitab-egitimleri-12-pareto-analizi/. [Erişildi: 2 February 2020].

  • [14] "Pareto Analysis / Colorado DOT," [Online]. Available: https://www.codot.gov/business/process-improvement/self-service/tools/solve-guide/part4/pareto-analysis. [Accessed 02 02-Feb 2020].

  • [15] S. Onat, «Kraljic Portföy Analizi,» 19 09 2016. [Çevrimiçi]. Available: https://www.sedatonat.com/post/kraljic-portfoy-analizi. [Erişildi: 29 08 2020].

  • [16] "List of countries by electricity consumption," [Online]. Available: https://en.wikipedia.org/wiki/List_of_countries_by_electricity_consumption. [Accessed 01 09 2020].

  • [17] "List of Nobel laureates by country," [Online]. Available: https://en.wikipedia.org/wiki/List_of_Nobel_laureates_by_country. [Accessed 01 09 2020].

  • [18] "Microsoft's CEO: 80-20 Rule Applies To Bugs, Not Just Features," [Online]. Available: https://www.crn.com/news/security/18821726/microsofts-ceo-80-20-rule-applies-to-bugs-not-just-features.htm. [Accessed 01 09 2020].

  • [19] "Employement in industry," [Online]. Available: https://data.worldbank.org/indicator/SL.IND.EMPL.ZS. [Accessed 04 09 2020].

  • [20] "Is Warren Buffett's 90/10 Asset Allocation Sound?," [Online]. Available: https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp. [Accessed 05 09 2020].

 






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