What is Pareto Analysis?
Pareto Analysis is a decision making technique based on the 80/20 rule where 80% of the benefits of the project can be achieved by the company by doing the 20% of the work or the 80% problem of the company is traced to 20 % causes. This decision-making technique separates the limited number of the input factors statistically which have the greatest impact on the outcome whether desirable or undesirable. It is found that Pareto analysis is applicable in various fields, from economics to quality control.
Components of Pareto Analysis
The steps involved in the Pareto analysis include the following:
- Identification and Listing of Problems – The first step in the Pareto analysis is to list down all the problems which are required to get resolved by taking the inputs from various means such as clients, team members, surveys etc.
- Root Cause Identification – After identifying the problem, their root cause should be identified using the different techniques available.
- Score Problems – Scoring of the problem should be done by assigning the numbers to each of the problems depending on the sort of problem that one is trying to solve.
- Grouping Problems – After scoring the problem, problems should be grouped together on the basis of the root cause.
- Adding Up Each Group Score – Scores of each cause group will then be added as a group with the highest score with being given the highest priority and lowest score will be given the lowest priority.
- Taking Necessary Action – Lastly, develop and implement an action plan for the purpose of solving problems with the focus on the highest scored problems first.
Example of Pareto Analysis
Let us take an example of Pareto analysis.
Mr X is the owner of the service centre which is not working well as expected. Mr X is worried about the same and wants to resolve the problems and increase the overall satisfaction of the customer. He decided to go for the Pareto analysis.
Step 1: Identification and Listing of Problems
Mr X lists the problems with the help of the number of complaints received by the service centre.
- Phone calls are not picked up quickly.
- Staff at the service centre doesn’t have enough knowledge to resolve customer complaints.
- No fix time of engineering staff of coming to the centre. for that reason, a customer may have to wait for a longer time.
- All the parts of the gadgets are not available so, a customer may need to visit the second time after placing the order.
- Staff is too few due to which they are under pressure.
- The problem could be solved over the phone for which the customers are asked to a visitor to the centre.
Step 2: Root Cause Identification
After identifying the problem, their root cause is identified as shown in the table.
Step 3: Score Problems
To score the problem, the number of complaints is taken as the base as received by the service centre. Scores are shown in below table.
Step 4: Grouping Problems
After scoring the problem, problems should be grouped together on the basis of the root cause. In the present case, three root causes are there which includes too few staff at the centre, lack of training, and poor organization.
Step 5: Adding up Each Group Score
Scores of each cause group will then be added as a group with the highest score with being given the highest priority and lowest score will be given the lowest priority.
Lack of training problem with the highest score with being given the highest priority.
Step 6: Taking Necessary Action
Lastly, develop and implement an action plan for the purpose of solving problems with the focus on the highest scored problems first. So, Mr X should focus more on giving training to the staff as by this he will get the biggest benefit. After this is done, he should look at the increasing number of staff.
Advantages & Disadvantages of Pareto Analysis
Some of the advantages of the Pareto analysis are as follows:
- Pareto analysis is one of the powerful tools for solving the problems which is simple and effective. Even though the technique is based on finding mostly 20 % of the fundamental causes which are responsible for the 80 % problems, still it can be used for the solutions where the rule of 80:20 does not apply.
- Problem-solving skills of the person conducting Pareto analysis can be increased because it enables the person in organizing problems related to the work into the cohesive facts and once these facts are outlined clearly planning can be started to solve problems.
- The procedures and the processes which are followed while making changes are generally documented while conducting the Pareto analysis which will help in better preparation and the improvements in the future decision making.
Limitations and drawbacks of the Pareto analysis include the following:
- Pareto analysis conducted does not provide the solutions to issues rather only helps in identifying a few significant causes that are responsible for the majority of problems.
- Pareto analysis is based on the past information which small businesses owners may not find useful because that might not represent the current situation of the company correctly.
- The Pareto analysis success is dependent on the accuracy of scoring of each of the issue. businesses which fail to assign proper scoring against each factor on the Pareto chart will get the inaccurate results.
Important Points of Pareto Analysis
- The idea of 80:20 rule states that 80 % of the benefit of the project can be achieved by the company by doing the 20% of the work or the 80% problem of the company is traced to 20 % causes.
- Each problem is given a numerical score on the basis of the level of impact.
Pareto Analysis is the technique for the prioritization of the work of problem-solving so that a number of problems could be solved. It is based on Pareto principle which is also known as 80/20 rule where the idea of 80/20 rule states that 80 % of the benefit of the project can be achieved by the company by doing the 20% of the work or the 80% problem of the company is traced to 20 % causes. The Pareto analysis does not only show the most important problem but at the same time, it also gives score showing the severity of the problem.
This has been a guide to what is Pareto Analysis and its definition. Here we discuss the example of Pareto analysis along with advantages and disadvantages. You can learn more about accounting from following articles –