A Pareto Chart is basically a combination of bar graphs and line graphs. It is a commonly used graphical tool for mapping business problems in descending order. This way, it helps the business owners to find the most frequently occurring problems and separate the significant ones.
This chart type is based on the Pareto principle, i.e., when an array of factors affects a situation, some factors are responsible for the most impact. The bar chart in a Pareto chart shows the frequency of occurrences, and a line graph shows cumulative data percentage. In this article, we will tell you how to create a Pareto Chart.
Steps To Create A Pareto Chart
Before we list the steps to create a Pareto Chart, first, let us put some light on how to get ready to create it.
The Pareto chart is used to prioritize people who make the biggest impact on the issues or which represent the large area of other opportunities. These diagrams show the principle of 80:20, which shows that 80% of the effect comes from 20% of the cause. For instance:
- 80% of the overall revenue comes from its 20% of customers
- 80% of the customers contribute to only 20% of the revenue
- 80% of the client’s complaints come from 20% of users
- Or 80% of the repair and maintenance time is spent on the few 20% of the problematic areas
Primarily, the 80:20 rules focus on the few yields higher than the trivial many. This is why the Pareto chart focuses on the priorities while trying to make effective decisions. Also, it’s one of the good and effective communication tools that show data on a simple and easy-to-read bar graph. The graph also lets you focus, study, and analyze the occurrence and frequency of the event.
A good Pareto diagram starts with good data; as in case the data that is needed is any measure of quality and contributes to the overall effect. The quality measures can be anything at which the team agrees and qualify the negative effect. The most common measures include cost, number of failures, time, and percent of the customers who express the opinion.
For the Pareto raw analysis, your data must:
- Use facts to make decisions, not opinions.
- Use the same measures, calculations, and same assumptions. In this, consistency is very important than real precision.
- Make sure your data represents the real conditions and keep the situation in the process.
- Don’t make controversial assumptions; just keep in mind that you are using the Pareto analysis to support the decision.
- Just be creative and try to incorporate the new techniques!
Like any other analytical tool, a Pareto Chart also requires good data. The data can be any measure of the quality that will express the negative impact of the problem under consideration. The commonly used measures include time, cost, %age of customers expressing an opinion, etc.
Make sure to use the same measure throughout the Pareto analysis. The data you use for creating a Pareto Chart.
- Use the same calculations and assumptions throughout.
- Represent the actual situations and conditions in a process.
- Not contain any controversial techniques.
- Be creative
Now that you have collected data, below are eight easy steps to creating a Pareto Chart.
Create a list of problems, causes, or items you want to compare. Think of a standard measure for the comparison. For example, frequency (how often something occurs), how many resources are used (cost), etc. Also, choose the timeframe for collecting the data.
Find the grand total of all the items and the %age of each item by dividing the sum of the items by the grand total and multiplying by 100.
Now, list the items in descending order of the comparison measure. Find the cumulative %age of the item, which is the sum of an item’s %age of total, as well as the %age of all the items that come before that in the order.
Label the left vertical axis with frequency, cost, or time starting from zero to the grand total. Then, label the right vertical axis with cumulative percentage drawn in the bars for each item.
Draw and label the horizontal by dividing the axis into as many divisions as there are items. List the items from the largest to the smallest, from left to right. You can label the axis as A, B, or C if the name of the items is long.
Next, draw a line graph to represent the cumulative %age of the total. Make sure that the first point on the line graph lines up with the top of the first bar. If it doesn’t, you have made an error.
If you are using Excel for drawing a Pareto chart, you use the charting tools to do it. Or, you can also do it with paper or a pencil.
Then, analyze the diagram, i.e., look for the items or contributors that account for the most difficulty. For this, you need to look for a breakpoint in the line graph, where it starts leveling off quickly. If you can’t find any breakpoint, look for the items that account for the maximum effect.
The last step is to name the chart, highlight the ‘useful many,’ ‘vital few,’ and show the cumulative % of the contributors.
With these eight steps, you should be able to draw a Pareto Chart easily.
This is all you need to know about creating a Pareto Chart. The main objective of drawing this type of chart is to identify and highlight the most important factors among a large set. It comes in extremely handy in quality control, where you need to find the most crucial or frequent causes of defects, the most frequently occurring defect, the most common reasons for customer complaints, and many more. So, get started with creating a Pareto chart with the steps mentioned above.