PARETO ANALYSIS IN ENGINEERING

The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle
of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of
the causes.

Management consultant Joseph M. Juran suggested the principle and named it after Italian
economist Vilfredo Pareto, who, while at the University of Lausanne in 1896, published his first
paper "Cours d'économie politique." Essentially, Pareto showed that approximately 80% of the
land in Italy was owned by 20% of the population; Pareto developed the principle by observing
that 20% of the peapods in his garden contained 80% of the peas.

It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your
clients." Mathematically, the 80–20 rule is roughly followed by a power law distribution (also
known as a Pareto distribution - The Pareto distribution, named after the Italian civil engineer,
economist, and sociologist Vilfredo Pareto, is a power law probability distribution that is used in
description of social, scientific, geophysical, actuarial, and many other types of observable
phenomena.) for a particular set of parameters, and many natural phenomena have been shown
empirically to exhibit such a distribution.

Figure 1 : Cumulative Nature and Skeweness Distribution

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The Pareto principle is only tangentially related to Pareto efficiency. Pareto developed both
concepts in the context of the distribution of income and wealth among the population.

Pareto efficiency, or Pareto optimality, is a state of allocation of resources in which it is

impossible to make any one individual better off without making at least one individual worse
off. The term is named after Vilfredo Pareto (1848–1923), an Italian engineer and economist
who used the concept in his studies of economic efficiency and income distribution. The concept
has applications in academic fields such as economics, engineering, and the life sciences.

Engineering trouble shooting examples; pumps, engines, dam designs and water resources.

In economics, the Lorenz curve is a graphical representation of the distribution of income or of

wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth
distribution.

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Economics

Distribution of world GDP, 1989[8]

Quintile of population Income

Richest 20% 82.70%

Second 20% 11.75%

Third 20% 2.30%

Fourth 20% 1.85%

Poorest 20% 1.40%

Business

The distribution is claimed to appear in several different aspects relevant to entrepreneurs and
business managers. For example:

 80% of a company's profits come from 20% of its customers

 80% of a company's complaints come from 20% of its customers
 80% of a company's profits come from 20% of the time its staff spend
 80% of a company's sales come from 20% of its products
 80% of a company's sales are made by 20% of its sales staff

Therefore, many businesses have an easy access to dramatic improvements in profitability by

focusing on the most effective areas and eliminating, ignoring, automating, delegating or
retraining the rest, as appropriate.

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Occupational health and safety

The Pareto principle is used in occupational health and safety to underline the importance of
hazard prioritization. Assuming 20% of the hazards will account for 80% of the injuries and by
categorizing hazards, safety professionals can target those 20% of the hazards that cause 80% of
the injuries or accidents. Alternatively, if hazards are addressed in random order, then a safety
professional is more likely to fix one of the 80% of hazards which account for some fraction of
the remaining 20% of injuries.

Aside from ensuring efficient accident prevention practices, the Pareto principle also ensures
hazards are addressed in an economical order as the technique ensures the resources used are
best used to prevent the most accidents.[17]

The Pareto principle has many applications in quality control.[citation needed] It is the basis for the
Pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle
serves as a baseline for ABC-analysis and XYZ-analysis, widely used in logistics and
procurement for the purpose of optimizing stock of goods, as well as costs of keeping and
replenishing that stock.[19]

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