pareto principle explained
DESCRIPTION
ABC or 80/20 Rule or Pareto Principle ExplainedTRANSCRIPT
ThePareto Principal
…. also
Known By
Many Other Names
Vilfredo Pareto,
1848-1923
A ‘GREAT” Management Tool .. With Many Names!
The “Pareto Principle”
“The Law of The Vital Few
and the Trivial Many”
The “Power Law”
“Participation Inequality”
The “80 – 20 Rule”
ABC Analysis Technique
Vilfredo Pareto,
1848-1923
Introducing “Alfred PARETO”
In 1879, the famous Italian economist Alfred
Pareto, noticed that 80% of Italy’s wealth was
controlled by 20% of the population.
This concept is known as “Pareto’s Law” or
“Pareto’s Rule” or “Pareto Principle” or “Principle
of imbalance” or simply “The 80/20 Rule”.
Subsequently, people in various disciplines and
professions noticed that this same 80/20 applied,
in a broad way, to a wide range of phenomena. Dr.
Joseph Juran also recognized this concept as
universal that could be applied to many fields. He
coined the term vital few and useful many.
Introducing Dr. Joseph M. Juran
Quality Management pioneer, Dr. Joseph Juran
recognized a universal principle he called the "vital
few and trivial many".
In an early work, a lack of precision on Juran's part
made it appear that he was applying Pareto's
observations about economics to a broader body of
work.
The name Pareto's Principal stuck, probably because
it sounded better than Juran's Principle.
As a result, Dr. Juran's observation of the "vital few
and trivial many", the principle that 20 percent of
something always are responsible for 80 percent of
the results, became known as Pareto's Principle or
the 80/20 Rule.
Dr Joseph M. Juran
The Pareto Principle – aka
The 80 – 20 Rule
Vilfredo Pareto,
1848-1923
The Pareto Principle – aka
The 80 – 20 Rule
The VITAL FEW
Vilfredo Pareto,
1848-1923
Examples Pareto Principle / 80 – 20 Rule
20% of the Code
Has 80% of the Defects.
Vilfredo Pareto,
1848-1923
Examples Pareto Principle / 80 – 20 Rule
20% of the Modules -
Consume 80% of the Resources.
20% of the Modules - Consume
80% of the Execution time.
20% of the repairs -
Consume 80% of repair costs.
20% of the enhancements -
Consume 80% of adaptive
maintenance costs.
20% of the tools -
Experience 80% of the tool
usage.
Vilfredo Pareto,
1848-1923
Examples of
Pareto Principle / 80 – 20 Rule
Input Output
Products
EffectCause
Efforts
Pareto Principle Also Applies to Inventory $ & Purchase $
Purchase $ Inventory $
80% $$$$$$$$$$$$$$$$$$$$$$$$$$$$
$$$$ 20%$$
80%
20%
Pareto Principle Also Applies to Purchases & Suppliers
Suppliers Purchases
Pareto Principle Also Applies to People
In-Put Output
Vilfredo Pareto,
1848-1923
Like Roads, Pareto Charts Can Be ……
COMPLEX
SIMPLE
OR
Vilfredo Pareto,
1848-1923
What Makes The Charts “Complex”?
Our initial “Simple” Charts will only involve
examination of the “Production of Doors” with
only:
6 Manufacturing Defects,
Over a Period of 31 Days.
Now visualize the greater complexity of Charts for;
An Inventory of 30,000 + Stock Keeping Units /
Items
Over a Period of 365 days.
When we are comfortable with the “Process” – the
“Complex will become Simple”
Vilfredo Pareto,
1848-1923
SO ……
In this Session we will start with simple
“Manual” Bar Charts - to learn the
“Process” …..
Then ……
In the NEXT Session “ABC Analysis” we will
move on to more complex Charts using “MS
Excel” to apply the “Process” to large
amounts of (Real Life) Data
Vilfredo Pareto,
1848-1923
Variables & Data
Variables and data can be:
Qualitative = the answer is NOT a number;
or
Quantitative = the answer IS a number.
REMEMBER - In Exercise 1Chart we will only be
examining ONE “Quantitative” VARIABLE –
“Frequency”
Vilfredo Pareto,
1848-1923
Back to BasicsThe Pareto
Frequency Diagram
The Pareto Frequency Diagram is a bar chart
which displays the causes of various defects, in
order, from:
The “most frequent” - to
The “least frequent”
so that you can focus attention on the Most
Frequent problems (which may or may
NOT be the most important – just the most
Frequent!.
Vilfredo Pareto,
1848-1923
Pareto Frequency DiagramEXERCISE # 1
Wooden glass doors are produced on a six day
work week.
At final checkout before shipping, the doors are
inspected and each is classified as conforming or
non-conforming and specific Defects are identified
for each non-conforming door.
The Next 2 Slides shows details of
“Nonconforming doors” or “Door Defects” identified
by day and by type of Defect:
Vilfredo Pareto,
1848-1923
“Door Defects” Defined
Day: Day Door is Mfg &
Inspected
Window: Window misaligned
Discolor: Discolor
Handle: Handle hole missing
Hinges: Hinges wrong
Rough: Rough wood
Glass: Broken glass
Warped: Warped
Vilfredo Pareto,
1848-1923
Day Defects Detected Each Day
Window Discolor Handle Hinges Rough Glass Warped
1 1 3 2 7 1 4
2 2 2 3 3
3 2 1 4 4 1
4 2 3 3 1 1 1 1
5 1 2
6 2 2 4 1 1
8 1 1 1 3
9 1 2
10 2 3 2
11 5
12 1 1 4 4 1
13 1 4
15 2
16 2
17 2 2 1
18 1
19 6 3
20 3 2
22 2 1
23 3
24 1 2 1
25 2 2 3 2 1 2
26 1 2 3 4
27 2 3 2 1
29 1 2 3
30 2
31 5
Total 6 24 28 60 24 12 14
Defects Detected Per Day!
Vilfredo Pareto,
1848-1923
1 2 3 4 50
1
2
3
4
5
6
7
8
Window
Discolor
Handle
Hinges
Rough
Glass
Warped
Can You See A Pattern?
Nor can I (yet)!
Bar Chart of Defects by DayCan You Identify The Problem Area?
Vilfredo Pareto,
1848-1923
Pareto Frequency Chart
EXERCISE # 1
Using the Data from the
“Defects Detected By Day”
Slide and the Blank “Graph” in
your Notes, make up a Pareto
“Frequency” Chart (a Bar
Chart Format) with the:
Highest Frequency /
Tallest Bar on the Left, &
Lowest Frequency /
Shortest Bar on the Right.
Exercise # 1Mfg Fault Frequency Chart
Exercise 2 =Create the “Pareto Curve”
for the Door Defects
#Exercise 2 Steps =
1. Convert the “Number” of each fault to a % of total
Defects & calculate the “Cumulative %” of Defects.
2. Create a Bar Chart that Show the % of Individual
Defects (Tallest on the Left) AND
3. Include the Cumulative % of the Defects in the Chart
THEN
4. Draw a line that joins the tops of each of the
Cumulative % “Bars” (That “Curved Line” is the
“Pareto Curve”
%
Exercise 2 = Convert Chart 1 to “%” of Problems + Add a “Pareto Curve”
to the New Chart
Complete Exercise # 2
“Pareto Frequency Chart” with Pareto
Curve for Manufacturing
Defects
Your Chart Should Look Like
This
Vilfredo Pareto,
1848-1923
QUESTION?
Are the “Hinges” the MOST
IMPORTANT Problem to be
solved??
YES? or NO?
NO! It is the “Most Frequent” problem
- but we can not be sure if it the
most important until we take into
account “Other Variables”
Vilfredo Pareto,
1848-1923
Another Variable To Consider!
We know the “Most Frequent”
Fault but to get a firm base for
a “Decision” we need to
consider another key
“Variable” …….
“The Cost to fix each Fault!
Vilfredo Pareto,
1848-1923
EXERCISE # 3 Pareto “Fault Costs” Chart
We will now use the same
technique with the “Cost “
Data from the Next Slide to
create a Pareto Fault “Cost”
Chart.
Then we will know the
relative “Cost” of each Fault!
= 1 step closer to a “Decision
Chart”
Exercise 3Pareto Cost Chart
A Pareto Diagram can display the costs of various defects, in
order, so you can focus attention on the most important
problems.
ASSUME the following costs for each of type of defect.
Vilfredo Pareto,
1848-1923
EXERCISE # 3 Pareto Fault “Cost” Chart
Using the Data from the previous
Slide and the Blank “Exercise 2
Graph” in your Notes, make up a
Pareto “COST” Chart (a Bar Chart
Format) with the:
Highest COST / Tallest Bar on
the Left, &
Lowest COST / Shortest Bar
on the Right.
Vilfredo Pareto,
1848-1923
QUESTION?
We now know “Hinges” are the MOST FREQUENT fault !
AND
We also know that “Hinges” are
the MOST EXPENSIVE fault
SO …
You tell me – Which is the MOST
IMPORTANT fault to fix FIRST!
Vilfredo Pareto,
1848-1923
What Else Do We Need To Do To Make a Valid Decision?
Vilfredo Pareto,
1848-1923
EXERCISE # 4Pareto Decision Chart
The MOST IMPORTANT Fault to be corrected can
not be identified from the date we have so far;
Now we will make up a “Pareto Decision Chart”
that we clearly identify the “most important fault”
that must be corrected immediately.
Use the same process to construct your Chart
and the data for inclusion in your Chart is:
Frequency of each Fault
Multiplied By
The Cost of each Fault. &
Converted to % of Total Costs
Exercise 4 - Pareto Chart “Cumulative Cost of Faults”
Steps Taken:
1. # of Faults x $
Cost of a Fault
= Total Costs
2. Sort into
Sequence
Highest Total
Cost to Lowest
Total Cost
Exercise # 4 Create a
“Pareto Decision Chart” that Shows You To Identify the most
Important 80% of the Cost of Defects to be
Attacked!
Your Chart Should Look Like
This
Vilfredo Pareto,
1848-1923
Pareto Charts
Pareto Charts Defined
Pareto charts are used to identify and
prioritize problems to be solved.
They are actually histograms aided by the
80/20 rule adapted by Joseph Juran.
Remember the 80/20 rule states that
APPROXIMATELY 80% of the
problems are created by
APPROXIMATELY 20% of the
causes.
Vilfredo Pareto,
1848-1923
Have YOU Become An 80/20 Individual?
An 80/20 Individual is a person who has learned
that in order to have success, they don't need to
be increasing their effort by 110%. Most people
who do this are simply doing the wrong things
more often.
Instead, an 80/20 individual looks at the 20% that
is responsible for 80% of their results and then
they focus on improving this 20%!
Is it really that simple? ………. Yes!
Once you are taught how and what tools to use
to improve your results, the only question left
is ..... Will YOU take action?
Vilfredo Pareto,
1848-1923
Any Questions?