Pareto

Pareto chart is a type of bar graph. The length of bars represents frequency or cost (time or
money), the bars are arranged in descending order, i.e., the longest one is on the left and
shortest one on right. The chart is arranged in such a manner so that the chart visually depicts
which situations are more significant.
The Pareto represents the relationship between two quantities. In this relationship, a relative
change in one quantity results in a relative change in the other quantity. These quantities,
changes and relationships can be seen in the Pareto chart.
The Pareto helps in prioritising the major issue in the industry.
The Pareto Principle
Pareto chart was developed by Vilfredo Pareto after he observed that only a few people held
the majority of wealth. Pareto developed logarithmic mathematical models to explain this
non-uniform distribution of capital and the M.O. mathematician. Lorenz has created
illustrations to demonstrate this.
The Pareto principle is also known as 80/20 Rule, The Law of the Vital Few and The
Principle of Factor Sparsity, it means that 80% of effects arise because of 20% of the causes.
Later, Dr Joseph Juran pointed out that Pareto as a universal principle and applied to a large
number of other situations.
Procedure
The first step for making a Pareto chart is to list all problems and causes to be analysed. A
measure is created which helps in the comparison of causes. The measure can help measure
the frequency of the problem concerning complications, errors time consumed by the
problem, and consumption of corporate resources.
Then, a particular time interval is fixed to dept all the information in the Pareto chart. A finite
period is mandatory for an accurate analysis of problems faced.
The percentage of each problem is noted
Then the data is analysed and is arranged in decreasing order of the measure of comparison.
The information is arranged on the horizontal axis of the bar graph. Frequency, time and cost
values are affixed to the left vertical axis. The right vertical axis should have a cumulative
percentage of every issue. The total percentage must be equal to 100%. A line graph
connecting the cumulative percentage is drawn next.
The outcome of the analysis helps in prioritising problems occurring. Break points in the line
graph represent the changes in causation.
Application
Pareto Analysis is generally applicable to various situations of business organisation-
1) Pricing of product - In a business, analysing Cost-Volume-Product can be difficult to
determine for all the products and to recognise which products are necessary for
company’s growth, as only 20% of products may account for 80% of total sales
 revenue. Management might have a problem while determining the price of items in
such scenarios as well. Hence, a Pareto Analysis is used. It helps in pricing decisions
of products.
2) Customer Profitability Analysis – Most of the businesses analyse customer relations
with the company after a certain point of time to determine consumer Profitability.
Some customers are more profitable than others. To determine customer group which
accounts for 80% of profit of the company pareto analysis is done.

References
 WHAT IS A PARETO CHART? https://asq.org/quality-resources/pareto; Accessed
on 20/12/2020, 22:35
 Pareto Chart: What, When, and How to Use It – Jose Maria Delos Santos Published
on 1/05/2020; https://project-management.com/pareto-chart-what-when-how/;
Accessed on 20/12/2020; 23:05
 Pareto Principle (80/20 Rule) & Pareto Analysis Guide – Published on 12/03/3019;
https://www.juran.com/blog/a-guide-to-the-pareto-principle-80-20-rule-pareto-
analysis/; Accessed on 21/12/2020; 23:21
 What is a Pareto Chart? Definition and Examples Published on 06/08/2020;
https://tulip.co/blog/manufacturing/what-is-a-pareto-chart-definition-and-examples/;
Accessed on 21/12/2020; 14:50
 Applications of Pareto Analysis – Updated on 18/09/2020;
https://www.geeksforgeeks.org/applications-of-pareto-analysis/; Accessed on
21/12/2020; 16:40