What is a Pareto Chart?
A Pareto chart is a specialized bar chart that displays categories in descending order and a line chart representing the cumulative amount. The chart effectively communicates the categories that contribute the most to the total. Frequently, quality analysts use Pareto charts to identify the most common types of defects or other problems.
Learn how to use and read Pareto charts and understand the Pareto principle and the 80/20 rule that are behind it. I’ll also show you how to create them using Excel.
What is the Pareto Principle?
This chart is named after Vilfredo Pareto. He was an Italian economist who observed that 80% of the land was owned by 20% of the people in the 1800s. This observation inspired the Pareto principle, which is the origin of the 80/20 rule. This premise states that approximately 80% of outcomes originate from 20% of causes for many study areas. It stems from a power law relationship that applies to a variety of areas, at least approximately. For example, you probably use 20% of the applications on your PC about 80% of the time. And, you likely wear 20% of your clothes 80% of the time. At a business, 20% of clients account for 80% of the sales.
While this relationship doesn’t apply to all areas, it fits many subjects at least roughly. And Pareto charts help you determine if the principle applies to your study area.
It’s a simple graph but surprisingly effective at focusing efforts on the most critical areas. What are the most common issues? Pareto charts are powerful tools for guiding decision-making and problem-solving endeavors in an organization.
What are Pareto Charts?
Pareto charts are beneficial when you have many problems, causes, or conditions and want to find the vital few out of the trivial many. In other words, these graphs identify the 20% of categories that are responsible for 80% of the outcomes.
Pareto charts display this graphically by showing bars that represent each cause. It presents these bars in descending order of frequency. Even when there are many causes, you’ll frequently find that just a few of them cause the majority of outcomes. Those vital few will be the first several bars on a Pareto chart.
Use a Pareto chart to help prioritize efforts in areas that will have the most significant impact. You want to focus your energy on a small number of causes that will produce the most results. That’s where you get the most bang for your buck. You don’t want to prioritize working on issues associated with a small number of events.
Using and Reading Pareto Charts
Quality analysts frequently use Pareto charts to find the most common problems in a process, such as product defects, motives for customer complaints, and top mistakes in a hospital or other settings. Knowing these answers helps direct their quality improvement efforts.
Because Pareto charts display the relative magnitude of different categories sorted by significance, you can use them for various purposes beyond quality control. These include finding the most common reasons employees leave a company, causes for flight delays, products with the top revenue, and business processes associated with the most losses. In all these cases, the goal is to separate the vital few from the trivial many.
Use a Pareto chart when you can place your causes into categories and can count how often each type occurs. The largest categories are on the left side of the chart, and they become smaller as you move right. The cumulative line indicates the total percentage as you add each type. Reading a Pareto involves assessing the cumulative line to help you identify the most common problems. When a few causes account for most of the outcomes, the cumulative line rises quickly and then levels out.
Related post: Bar Charts
Pareto Chart Example
Quality analysts are identifying the most common defects with a product. They’ll target their quality improvement efforts on the most frequently occurring defects first. After collecting a random sample of data, categorizing the types of defects, and recording their frequencies, they produce this Pareto chart.
Pareto charts typically contain bar graphs and line charts with the following elements:
- Y-axis left: Frequency or percentages for the categories in the bar chart. Alternatively, it can display costs, revenue, time, etc.
- Y-axis right: Cumulative percentages, costs, revenue, time, etc., for the line chart.
- Categories on the x-axis.
- Vertical bars representing the value for each category. The bars are in descending order.
- Cumulative percentage line.
Here’s how to read a Pareto chart. For the defect data, the first two bars are the tallest and comprise a large percentage of all outcomes. The cumulative line chart rises steeply at first and then levels out, indicative of the Pareto principle in action. The first two categories account for approximately 80% of the defects.
Collectively, the graph indicates that dents and paint defects are the two most common types of defects. The analysts decide to prioritize reducing these two types first. Additionally, the analysts will present this graph to upper management to support their decision.
How to Make a Pareto Chart in Excel
Making a Pareto chart in Excel is easy. Start by arranging your data to have a column of categories and another for frequencies, as shown below. Click here to download the Excel file: Pareto chart.
To create a Pareto chart in Excel, follow these step-by-step instructions.
- Select both columns of data.
- From the ribbon, click the Insert tab.
- Click Recommended Charts and then click the bottom chart in the list.
- Click OK.
Voila! Excel will create a bar chart with the groups in descending order, calculate the percentages, and include a cumulative percentage line!