The Pareto principle is a heuristic which states that 80% of the effect (Y) can be attributed to the 20% of the drivers (x1..xn). This means that with a limited time&money the best way is to focalize on this 20% of the driver.
For use this principle in the Pareto Analysis, the first step is gathering and input the data in a table like the table1, where you put:
- Column1: the list of the possible reason;
- Column2: the frequency of each reason (you need to order the reason by frequency or have a program, like excel, who do it for you)
- Column3: the frequency in percentage (that is frequencyxi / sum_of_all_frequency)
- Column4: The cumulative rate (that is frequency_in_percentagexi + frequency_in_percentagexi-1)
- Column5: the cumulative rate * 100 (that is cumulative_ratexi * 100)
At this point, you can plot the Pareto Chart using the Reason, the Frequency, and the Cumulative rate *100 like in Image1.
We can quickly look in image1 is that problem2, problem5, and problem3 affect the Y in 80% of the case, and we can easily say this looking at the red line of the cumulative frequency.
To the exam you need to remember that:
- Pareto principle states that 80% of the effects can be attributed to 20% of the causes;
- You need to remember to do a Pareto chart.