Pareto Principle

Quick reference

• 00:05 Hi, this is Ray Sheen.
• 00:07 I want to take a few minutes to discuss a principle we will use again and again.
• 00:11 It's called the Pareto Principle.
• 00:15 One thing that we continually find we must do is prioritize our work.
• 00:19 We don't have unlimited time and money, so
• 00:21 we need an easy method to decide what to work on and what to ignore.
• 00:26 The Pareto principle does this for us.
• 00:29 I mention that we will use this again and again on our Lean Six Sigma projects.
• 00:32 The first time it is used is by the stakeholders to help them decide
• 00:36 which process the team should work on next.
• 00:39 One of the nice points about Pareto is that it works with
• 00:41 any type of measurement.
• 00:43 It could be cost, customer impacts such as sales, business process impacts such as
• 00:48 defects, or even the number of people needed to work on the project.
• 00:52 The stakeholders can decide what metric is most important
• 00:55 based upon the business strategy and pain points.
• 00:58 Then all of the potential Lean Six Sigma projects are gathered up and
• 01:02 a quick account is made of how each project measures up
• 01:04 based upon the stakeholders metric.
• 01:07 Taking the value for each process, we can create a Pareto chart and
• 01:10 be able to visually see which process should be the next one to work on
• 01:15 in our now prioritized list.
• 01:17 Let me show you how the PARETO process works.
• 01:21 In a Pareto analysis, we first list all the potential projects,
• 01:24 or list whatever else it is that we are trying to prioritize.
• 01:28 You'll find in a later phase, we prioritize root causes with Pareto.
• 01:33 Now, based upon the selected metric, we create a score or account for
• 01:36 each of the processes.
• 01:38 Let's say our metric is errors, and we have 10 processes.
• 01:42 We could look at the last three months and
• 01:44 count the number of times an error occurred in each process.
• 01:48 Now, we plot those on a vertical bar chart.
• 01:51 The process with the highest number of errors is in the farthest left position.
• 01:56 Then, the next highest number, and the next, and
• 01:59 the next, until we get to the process with the fewest number of errors,
• 02:03 which is in the farthest right column.
• 02:05 Now, take a minute and look at this graph.
• 02:08 There are two vertical scales.
• 02:09 The left scale is the actual count of whatever you are measuring.
• 02:13 In our case, it's errors.
• 02:15 The blue bars are using this scale, and you can see the process A has 76 errors.
• 02:20 The next process only has 28 errors.
• 02:23 We keep going down until we get to the last two processes,
• 02:27 each with only one error in the past three months.
• 02:29 The right-hand vertical scale has units of percentage.
• 02:34 The red line is using this scale.
• 02:36 The scale shows accumulative percentage of all errors across
• 02:40 all processes that are included to the left of a position on the line.
• 02:45 So the first process, process A, represents 62% of all errors.
• 02:50 And processes A and B combined represent 81% of all errors.
• 02:55 This line will always end at 100% because by the time we have
• 02:59 included all the processes, we've accounted for all of the errors.
• 03:04 Priority is given to the left-most column.
• 03:06 This is because if I can reduce or eliminate that column,
• 03:09 it will have the biggest impact on the overall number of errors.
• 03:13 So in our example, if we can expect the Lean Six Sigma project to reduce errors to
• 03:17 just 25% of what they had been initially, doing project A would
• 03:22 eliminate 57 errors whereas doing project B would only eliminate 21.
• 03:27 If the amount of work was the same,
• 03:29 we would get a much larger business impact working on project A.
• 03:34 Now, you may say to yourself, but why do we need a chart?
• 03:38 Why not just use the numbers in a table?
• 03:40 Well, a reason is that many people understand a picture of data
• 03:43 faster than they can understand numbers in a data table.
• 03:46 The chart improves communication and it isn't hard to make.
• 03:50 Now, you may be wondering, why is it called a Pareto chart?
• 03:56 It was developed by Vilfredo Pareto,
• 03:57 an Italian engineer economist and behavioral scientist.
• 04:01 Pareto was studying the Italian economy and
• 04:03 found a consistent pattern across the country.
• 04:06 20% of the population controlled 80% of the wealth.
• 04:09 The principle became know as the 80/20 rule, and
• 04:13 people found that principle apply to much more than just wealth in a country.
• 04:17 In almost any kind of ranking, there were a few major items with a large value and
• 04:23 lots of items with a small value.
• 04:25 Within the process improvement community, the 80/20 rule is often applied to root
• 04:30 causes where we find 80% of the defects come from just 20% of the defect causes.
• 04:36 So whether we are prioritizing processes, root causes, or
• 04:40 impact of solutions, we'll find that the Pareto principle to be a quick and
• 04:44 simple analysis that graphically displays what is most important to work upon.
• 04:51 The Pareto Principle is one of the easiest and yet
• 04:54 most powerful tools that we'll use with Lean Six Sigma projects.
• 04:57 And that just shows that advanced statistics are not always required
• 05:02 to have a successful Lean Six Sigma project.

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