What Is The Pareto Principle?

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What is the Pareto Principle? Well, let me give you a small example to help you understand.

Have you ever realized that out of all the clothes in your closet, you only wear around 20% of them, 80% of the time?

The pareto principle, also known as the 80/20 rule

It was Joseph M Juran, who published this concept that helps with quality control and product and service improvement. However, it was the great Italian economist Vilfred Pareto who first took note of this in 1896 while he was at the University of Lausanne. Pareto was working on land distribution in Italy when he noticed that 20% of the Italian population owned around 80% of Italy’s land. Shocking, isn’t it?

The pareto principle origins

Well, not really. Pareto went on to do surveys on other countries to see if he could see a similar pattern and just as he predicted, he did. A similar trend was seen in other countries as well.

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Let me show you a few other natural situations where this 80/20 principle was noted.

1. Business Sector

20% of the company’s clients generate 80% of the sales and for some, 20% of the product and services line generate 80% of the sales.

2. Technology Sector

Microsoft once reported that 80% of the errors and system crashes were eliminated by simply fixing 20% of the most reported bugs. Another individual reported that in a lot of coding work, 80% of the errors come from 20% of the code. It was also noted that the most difficult 20% of the code usually takes up 80% of the time.

3. Sports Sector

In baseball, it was noted that around 20% of the players scored 80% of the goals and achieved wins for the team. The remaining 80% of the players only scored around 20% of the goals. It has been seen to be applied in training and exercise as well. For instance, it is seen that 20% of the exercises that you do have 80% of the impacts and trainers have suggested that instead of doing a complete workout with many different varieties, focus on the few that are actually helping you.

4. Health and Safety

Out of all the safety hazards, 20% of them cause 80% of the injuries. By fixing that 20%, 80% of the hazards could be eliminated.

Hospitals also noted that 80% of the healthcare resources were being used up by 20% of their patients.

In the case of a pandemic, 20% of the infected patients are responsible for transmitting 80% of the specific disease. This was noticed even during the COVID-19 pandemic.

5. Criminal Activity

A study done on criminal activity reported that 80% of the crimes in the world are done by about 20% of the criminals and if this 20% were to be caught, 80% of the crimes could be eliminated.

6. Education Sector

A study showed that by focusing on the most effective 20% of the activities that a teacher gives during class, students are able to learn more than 80% of the lesson.

There are so many other sectors that I’ve not mentioned here which proves the Pareto principle. If you pay very close attention to almost all natural phenomena, they tend to showcase this 80/20 trend very clearly. ‘The law of the vital few’, ‘the 80/20 rule’, and ‘the principle of factor sparsity are a few other names that the Pareto principle goes by.

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The Power of The Pareto Principle

As mentioned previously, the Pareto principle is able to help you understand how the inputs and outputs, actions and consequences work.

By understanding and paying attention to the powerful 20% of the causes which lead to 80% of the consequences, any individual or business is able to improve their growth drastically.

The Pareto Analysis

1. Find out and list down the exact problems and issues

Before you get into the analysis, you need to figure out what the problems associated with your business are. You can do this by either doing surveys or questionnaires and gathering input from customers.

2. Score the problems

I’m sure you’ve received a lot of problems in the previous step. Give each of them a score according to their importance and relevance to the sort of problem that you’re trying to resolve.

For instance, if you’re trying to solve a problem relating to customer satisfaction, you could score them based on how many complaints you received regarding that issue.

3. Find the root cause of each and every problem

Take a good look at the list of issues that you’ve identified in the previous step, and figure out the root cause for the problems listed.

4. Group The Problems

Use the analysis you did in step 2 to put the different problems in groups based on a common cause. For instance, if five of your problems are caused by poor packaging, you could put them into the same group.

5. Add Up The Scores

By now, you should have different groups based on the root cause with a score beside each of the problems. For each group, add up the different scores and get a number.

The group with the highest score should be given the highest priority and the group with the lowest score can be given a lower priority.

Once done, this is most likely what it will look like. I’ll give you an example so you’ll understand better.

Red apples for pareto analysis

Assume you’re an owner of a store that sells apples and you have noticed that the customers aren’t too satisfied with the shop and you want to know why. Let’s assume you have done a survey to learn more on what the customers complain the most about. After following all the steps in the Pareto analysis, this is what your table should look like.

The Pareto analysis table
  1. High Cost (item 1) – 5 complaints.
  2. Lack of Staff (items 2 and 3) – 29 complaints.
  3. Lack of Training (items 4, 5 and 6) – 6 complaints.

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Pareto Analysis Bar Chart

The bar chart generated using this data will clearly show you which cause is leading to the most problems. The highest score in this chart is 29 and the root cause belonging to this group is ‘lack of staff’. This means that if this cause is to be fixed, the majority of the issues would be fixed.

6. Take Action

This step is where you make the necessary changes to try and fix the problem. The highest scoring problem will most likely be around 20% of the problems and will resolve 80% of the issues once fixed. Give the lowest scoring problems lower priority as they will only resolve less than 20% of the problems and will most likely be too inconvenient or costly to fix at the moment.

There are many ways to use the Pareto principle to help you solve your or your companies problems. So, you need to do proper analysis in order to get the best results. If done properly, you’ll be able to spot causes that give you the most problems because fixing this high-priority cause should solve around 80% of your problems.

Hope this article helped you to understand the Pareto principle. If you enjoyed it, remember to leave a like and share this with your friends. Do check out my other articles which you might also find useful. Our Instagram handles are Smartiac and Smartiac.finance so, do remember to follow!

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