Pareto Chart Easy Guide (2012)

A Pareto chart named after Vilfredo Pareto (an Italian Economist) is a bar chart in which all bars are ordered from largest to the smallest along with a line showing the cumulative percentage and count of the bars. The left vertical axis has the frequency of occurrence (number of occurrences), or some other important unit of measure such as cost. The right vertical axis contains the cumulative percentage of the total number of occurrences or the total of the particular unit of measure such as total cost. For the Pareto chart, the cumulative function is concave because the bars (representing the reasons) are in decreasing order. A Pareto chart is also called a Pareto distribution diagram.

The Pareto chart is also known as the 80/20 rule chart. These charts offer several benefits for data analysis and problem-solving.

A Pareto chart can be used when the following questions have their answer is “yes”

1. Can data be arranged into categories?
2. Is the rank of each category important?

Pareto charts are often used to analyze defects in a manufacturing process or the most frequent reasons for customer complaints to help determine the types of defects that are most prevalent (important) in a process. So a Company can focus on improving its efforts in particular important areas where it can make the largest gain or the lowest loss by eliminating causes of defects. So it’s easy to prioritize the problem areas using Pareto charts. The categories in the “tail” of the Pareto chart are called the insignificant factors.

Pareto Chart Example

The Pareto chart given above shows the reasons for consumer complaints against airlines in 2004. Here each bar represents the number (frequency) of each complaint received. The major complaints received are related to flight problems (such as cancellations, delays, and other deviations from the schedule). The 2nd largest complaint is about customer service (rude or unhelpful employees, inadequate meals or cabin service, treatment of delayed passengers, etc.). Flight problems account for 21% of the complaints, while both flight problems and customer service account for 40% of the complaints. The top three complaint categories account for 55% of the complaints. So, to reduce the number of complaints, airlines should need to work on flight delays, customer service, and baggage problems.

By incorporating Pareto-charts into data analysis, one can get valuable insights, prioritize effectively, and make data-driven decisions.

References:

• Nancy R. Tague (2004). “Seven Basic Quality Tools”. The Quality Toolbox. Milwaukee, Wisconsin: American Society for Quality. p. 15. Retrieved 2010-02-05.
• http://en.wikipedia.org/wiki/Pareto_chart

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