Pareto Analysis

Pareto analysis is a decision-making technique based on the 80/20 principle: roughly 80% of effects come from 20% of causes. It helps prioritize efforts by identifying the relatively few causes that produce the majority of problems (or benefits), enabling more efficient use of time and resources.

Origins and concept

• Originated from Vilfredo Pareto’s observation (1906) that a small portion of the population owned a large share of wealth.
• Joseph Juran applied the idea to business, coining terms like “vital few” and “trivial many,” and showed that a small number of defects often cause most quality problems.
• The core idea: focus on the high-impact causes first to gain disproportionate improvements.

When to use Pareto analysis

• Prioritizing quality-control efforts (defects, errors)
• Identifying main sources of customer complaints or lost revenue
• Allocating limited resources to the most consequential issues
• Any situation where many causes exist but only a few drive most of the outcome

Basic steps

1. Define the problem or outcome to be improved.
2. List all possible causes or contributing factors.
3. Select a consistent measure (frequency, cost, time, number of complaints).
4. Collect data for a defined time frame.
5. Score or tally each cause and calculate its percentage of the total.
6. Rank causes from largest to smallest and compute cumulative percentages.
7. Focus actions on the top causes (the “vital few”) and implement corrective measures.
8. Reassess after changes to confirm impact.

How to create a Pareto chart

1. Compile the list of issues and choose a metric (e.g., count, cost, time).
2. Tally totals for each issue over a chosen time period and compute each item’s percentage of the grand total.
3. Order items from highest to lowest by that measure.
4. On a chart, draw bars for each item (left vertical axis = metric) in descending order.
5. Add a line plot showing cumulative percentage (right vertical axis = 0–100%).
6. Identify the point where cumulative percentage shows the “vital few” (often around 70–90%) and target those items first.

Advantages

• Clarifies which issues will yield the greatest improvement if addressed.
• Helps prioritize actions, saving time and resources.
• Visualizes cumulative impact, making it easier to communicate priorities.
• Simple to construct and interpret.

Limitations

• Identifies causes but does not prescribe specific solutions.
• Based on historical data; past patterns may not predict future conditions.
• Focuses on observed categories—may overlook hidden or systemic root causes.
• Shows relative impact but is not designed for advanced statistical analysis of variability.

Example: Oil spill causes

A study of 209 oil spills identified dozens of causes. Six causes (about 20% of the listed causal categories) accounted for 149 of the incidents (71%):
– Inattention/distraction: 38
– Procedural error: 31
– Judgment: 26
– Mechanical failure: 23
– Structural failure: 20
– Unknown causes: 11

This demonstrates how addressing a small number of high-impact causes can substantially reduce overall incidents.

Pareto chart vs. standard bar graph

• A standard vertical bar graph displays individual values as bars without any required order.
• A Pareto chart orders bars from highest to lowest and overlays a cumulative percentage line. This ordering highlights which items are most significant and how much of the total they represent.

Related concept: Pareto efficiency

Pareto efficiency (or Pareto optimality) is an economic concept where resources are allocated such that no one can be made better off without making someone else worse off. It is about allocation efficiency, not fairness.

Bottom line

Pareto analysis is a practical, low-cost method to focus improvement efforts on the factors that matter most. By identifying and addressing the “vital few,” organizations can achieve large gains with relatively small investments of time and resources.