Some people are natural-born decision-makers.
They see simple problems like what to eat for lunch and more complex ones like where to go to college or whether to take a new product to market in the same light.
As a result, they tend to smash through mental barriers, avoid procrastination, and overcome obstacles with relative ease.
While people like that may seem superhuman, it’s far more likely that they’ve built confidence by knowing which tools to use and when to use them.
One such tool is the Pareto chart.
Tools like the Pareto chart are game-changers for people wanting to make high-impact changes to their organization.
In this article, you’ll learn about the origin of the Pareto principle, the definition of a Pareto chart, and how to make a Pareto chart for yourself so you boost your effectiveness as well.
What is the Pareto principle? How does it work?
In the late 19th century, an Italian engineer named Vilfredo Pareto made a groundbreaking discovery that rocked the world of microeconomics.
His discovery — known as the Pareto principle or 80/20 rule — rightfully became his namesake because of the profound impact it had on the world then and still does today.
The Pareto principle states that for most outcomes, 80% of consequences come from only 20% of the causes. It’s a power-law distribution that isn’t always exactly 80/20, but it’s often quite close.
In the 19th century, Vilfredo Pareto noticed that roughly 80% of Italy’s land belonged to only 20% of the population. As he surveyed other countries, he found the same distribution tended to apply.
Upon further examination, he concluded it applied to nearly everything. He even found that just 20% of the pea pods in his garden ended up producing nearly 80% of the peas.
The Pareto principle’s roots are in economics and process improvement, yet it’s found its way into modern culture.
These days the Pareto principle comes up a lot when discussing techniques for boosting productivity. There are countless examples of how it applies to real-world applications.
Wealth distribution follows this rule, as do federal income tax payments. In 2018, 20% of Americans ended up paying 87% of income taxes.
In the early 2000s, Microsoft found that 80% of errors were caused by just 20% of the bugs detected. They also found that their users only used roughly 20% of the overall features available to them.
The list of applications of the principle is endless and is rarely exactly 80/20, but it’s often quite close.
What is a Pareto chart?
Now that we’ve established a working understanding of the Pareto principle, we can move on to the Pareto chart.
In technical terms, a Pareto chart is a tool that highlights the frequency of defects alongside their cumulative impact.
In plain terms, a Pareto chart is both a line and a bar chart that shows where to focus your efforts and see the greatest results.
The idea is to identify the 20% of the changes that will yield the greatest results so you can move onto what the scientific community calls PDSA testing or Plan-Do-Study-Act.
All that means is you’ll create a test, see it through to completion, study the results, and take action based on what you’ve learned.
As you can see from the image above, the Pareto chart is a combo chart that fuses both a bar and line chart together.
It consists of a Y-axis on the left-hand side that shows the frequency of occurrences, your X-axis across the bottom that lists the categories, and another Y-axis across the right-hand side that shows the percentage of cumulative frequency.
As you track the data from your collection form, you’ll list them from most frequent to least frequent on the bar chart.
In terms of defects, you’d see the chart on the left with the highest bar has the most defects and will gradually drop off as the chart moves to the left.
The line chart represents the cumulative percentage of problems or defects — measured on the right side. The line intersects with the bar chart to help identify the 80/20 rule in action.
Why is a Pareto chart important?
These days everyone is looking for shortcuts and ways to automate their processes. We’re all doing more with less, and in that fight, we need allies.
monday.com research found that 63% of people believe they’re missing an opportunity to show their best work. A big part of that likely boils down to companies working on the wrong projects.
The general idea behind using a Pareto chart is to aid with prioritizing tasks.
The Pareto effect will aid your improvement efforts by helping identify the vital 20% that, if prioritized, will yield the greatest total effect.
The Pareto chart provides a repeatable and systematic approach to finding errors, defects, and problems. Companies that can consistently find bottlenecks or ways to improve their processes require less staff, fewer materials, and make greater profits as a result.
With a Pareto chart, your organization has more of a laser-focused view of the problems and defects that are slowing you down or costing you money.Without that line of sight, you’re susceptible to further errors and defects, which make your team less efficient, cause further wasted materials, and could damage your brand’s reputation if it becomes synonymous with problems or defects.
Who uses Pareto charts?
While the Pareto principle has its roots in economics and engineering, its use today varies widely. The Pareto chart is especially useful in the manufacturing industry.
Proponents of the Lean 6 Sigma managerial approach are constantly seeking ways to improve performance through eliminating defects and waste in manufacturing.
The Pareto effect helps visualize where the bulk of opportunities or problems in a process originate. In theory, if they tackle the largest sources of inefficiency up front, then companies will make their greatest improvements with the least amount of effort.
A real-world example of Pareto chart usage in action is the way the Arizona Registrar of Contractors (AzROC) uses them. The AzROC maintains contractor licenses, adopts set construction standards, enforces policies and procedures, and investigates violators.
They use Pareto analysis to assess the criteria most important to their customers and determine process flows to match so they can ensure they’re addressing their needs with the greatest impact upfront.
A 5-step guide to creating your own Pareto chart
By now, you probably realize the full scope and power a Pareto chart can offer your organization. There’s also a good chance you’d like to dive right in to create one for yourself.
Well, you’re in luck. Even if you only have rudimentary spreadsheet skills, you can create one on your own.
Here are 5 steps to creating your own Pareto chart today:
1. Gather your data
Before we dive into the actual spreadsheet or chart creation process, you’ll need to get your hands on all the data you’ll need to create your first Pareto diagram. If you have your data in spreadsheets already, then you can likely skip this step.
If you have your data in your software, you’ll want to export it.
Here at monday.com, we pride ourselves on providing an ultra-secure data storage solution so you can store all sorts of data ranging from customer data to product order information and more.
With monday.com, exporting your data to Excel is as easy as clicking into the 3 dots at the top right corner of every board, selecting More actions, and Export board to Excel.
From there, you can decide to export as a simple table or a table & updates. For our purposes, a simple table works perfectly since you just need the core data.
When you include updates, it’ll create another tab with all corresponding updates, replicas, and activity for reference.
In an instance where you don’t have your data readily available, you can always use monday.com to collect your data, either by creating a new board or by creating a survey.
All it takes to create a survey is a simple board with all the right mix of columns. Columns can be questions or prompts you’ll need to gather your data, a date, an address, and an assignment.
Once you’ve got that ready to go, it’s as simple as grabbing your unique link and sending it out.
2. Organize the data
Organizing the data just means putting it together in a format conducive to creating your Pareto chart.
Some specialized statistical software and chart generation tools are fully capable of creating Pareto charts and performing Pareto chart analysis, but we’ll stick with more simple solutions.
Most people still use Excel here, but Numbers, Google Sheets, LibreOffice, or your go-to spreadsheet application will work just fine.
For our purposes, we’ll be using Google Sheets since it’s free, easy to use, and it’s one of monday.com’s dozens of integrations. We’ll also use manufacturing defects as an example.
You’ll start by creating a title row at the top and type Defect in cell A1, Frequency in cell B1, and Cumulative Percentage in cell C1.
If you’re following along using your own data, you’ll list your products with defects in column A. If you’re using our dummy data, then write out Alpha through Echo in cells A2:A6.
Next up, you’ll type the frequency of each defect in the product over a specific period of time in cells B2:B6.
If it’s not in order from largest to smallest like the image above, then highlight all the individual values along with their corresponding product name, right-click, select Sort range, Sort by Column B, and finally click Z→ A, so it sorts largest to smallest.
3. Calculate cumulative frequencies
By now, you’ve got enough data for a nice little bar chart. It’s nothing special, but it’s an important foundation piece for the rest of the chart.
Before jumping to creating a chart, though, we’ll calculate the cumulative contribution or cumulative percentage.
The cumulative line always begins at the highest bar and extends upward to help you assess each category’s contribution. For this step, we’ll be using the following formula:
=SUM($B$2:B2)/SUM($B$2:$B$6)
If you’re following along at home with our examples, that formula will work right out of the box. If you’re using your own data, you’ll just need to tweak the range to include all your data.
For instance, if you have 10 products — not 5 like the example above — you’ll need to change the tail end of the formula from $B$6 to $B$11.
In action, here’s what the formula result should look like on the graph when it’s complete:
As you can see in column C from the table above, the cumulative percentage runs to a total of 100% to provide the entire scope of contribution.
Don’t worry if you’re not drawing any conclusions yet. In the next steps, we’ll bring in the chart and help you make sense of it all.
4. Add a combo chart to the data
Arguably the easiest step of the whole process is adding a combo chart using the data above. Partly because Google Sheets makes it so easy.
All you have to do is highlight all your data — including the titles. If you’re using our example, this will show A1:C6. Again, if you’re using your own data, you’ll want to highlight everything. Once highlighted, it’s as simple as clicking Insert in the bar at the top and selecting Chart.
There’s a strong probability that the Combo chart is the default selection. If it’s not, you’ll want to select it from the Chart type dropdown under Setup. If you’ve done it right, you should see something like this:
It has a bar chart and a line graph, so we’re getting close, but there’s still a crucial step we’re missing to make the graph complete. The cumulative percentage line graph isn’t quite where it needs to be.
5. Finish with a right Y-axis
The last step is adding our right Y-axis. To do that, right-click on any of the blue bars in the chart and click Series when the dropdown menu appears, then select Cumulative Percentage.
When the menu pops up on the right, you’ll want to glance toward the bottom and choose the Right axis beneath the Axis dropdown.
Here’s the step where things get interesting. The blue bar chart will highlight which defects are most prevalent, and the cumulative red line determines how much of the total problem would be fixed if the highest few were addressed.
For example, if our fake company here focused all their efforts on Alpha, Bravo, and Charlie defects, they’d resolve 80% of their total issues.
From here, you could leap straight into action and store your Pareto diagram in monday.com for future reference. Or you could move on to another product line and repeat this process to find even more areas for improvement.
Getting the most out of the Pareto principle with monday.com
Creating a Pareto chart may help identify where to focus your efforts, but your work is far from over. In fact, once you’ve identified the problem and know how you’ll solve it, the real work begins.
Here’s where having a Work OS like monday.com will aid you in making the greatest impact.
monday.com connects your organization in a way you’ve never seen before. You won’t need custom software for your sales team and another for HR.
You won’t need a separate one for customer service or order fulfillment either. All you need is the right mix of monday.com boards.
To help you skyrocket your efficiency and double down on the crucial 20%, here are some other useful monday.com features you’re sure to love:
- 8+ beautiful data visualizations that help you see your data from fresh perspectives
- 200+ board templates so you kick your Pareto analysis findings into action
- Integrated communication and collaboration tools that make it easy to share documents, get status updates, and share new findings
- Dozens and dozens of integration possibilities which includes Zapier that connects you to over 3,000 apps
- Fully functional mobile applications so you’re always connected to your team and can easily view your stored Pareto charts on the go
The list of monday.com features that’ll improve your efficiency is seemingly endless.
Finding more ways to be productive
Anyone can make better decisions when they leverage the power of Pareto charts and take action with monday.com.
Not only will you have the information you need to make more impactful decisions, but you’ll also get a streamlined Work OS that genuinely makes your life easier so you can focus on what matters most.
If you’re looking to boost your improvement efforts and make the greatest impact possible for your organization, give our Manufacturing Order Tracking template a try.
