Pareto diagram: What is it?

A Pareto diagram is a simple bar chart that ranks related measures in decreasing order of occurrence. The principle was developed by Vilfredo Pareto, an Italian economist and sociologist who conducted a study in Europe in the early 1900s on wealth and poverty. He found that wealth was concentrated in the hands of the few and poverty in the hands of the many. The principle is based on the unequal distribution of things in the universe. It is the law of the "significant few versus the trivial many." The significant few things will generally make up 80% of the whole, while the trivial many will make up about 20%.

The purpose of a Pareto diagram is to separate the significant aspects of a problem from the trivial ones. By graphically separating the aspects of a problem, a team will know where to direct its improvement efforts. Reducing the largest bars identified in the diagram will do more for overall improvement than reducing the smaller ones.

There are two ways to analyze Pareto data depending on what you want to know:

Counts Pareto

Use this type of Pareto analysis to learn which category occurs most often, you will need to do a counts Pareto diagram. To create a counts Pareto, you will need to know the categories and how often each occurred.

Cost Pareto

Use this type of Pareto analysis if you want to know which category of problem is the most expensive in terms of some cost. A cost Pareto provides more details about the impact of a specific category, than a count Pareto can. For example, suppose you have 50 occurrences of one problem and 3 occurrences of another. Based on a count Pareto, you would be likely to tackle the problem that occurred 50 times first. However, suppose the problem that occurred 50 times costs only $.50 per occurrence ($25 total) and the problem that occurs 3 times costs $50 each time ($150 total). Based on the cost Pareto, you may want to tackle the more expensive problem first. To create a cost Pareto, you will need to know the categories, how often each occurred, and a cost for each category.

See also:
>Pareto diagram: What does it look like?
>Pareto diagram: When is it used?
>Pareto diagram: Getting the most