Pareto chart is a Lean and Six Sigma tool. Pareto chart can be used in **Pareto Analysis** to perform root cause analysis. Pareto rule is also known as 80/20 rule since it states that 80% of the problems are caused by 20% of the causes or issues. **Pareto Chart** or **Pareto Diagram **is named after the Italian economist Vilfredo Pareto of the 19 th century.

Using this Pareto tool, one can visually identify the most occurring defects, most important factors or the most common problems. These “Most Important” factors are also known as “**The vital few**“.

## Data for Pareto Analysis

Lets take the example of customer returns of toys made by a toy manufacturer. Lets start collecting data about these rejection over a fixed time period, say one month. 854 data points have been collated and grouped into 5 categories:

- Category 1 (Example: Damaged Packaging) 155 Occurrences
- Category 2 (Example: Color Faded) 221 Occurrences
- Category 3 (Example: Missing Part) 33 Occurrences
- Category 4 (Example: Missing Brochure) 112 Occurrences
- Category 5 (Example: Wrong Toy Sent) 333 Occurrences

Now lets take the above defect categories and sort them in descending order based on the frequency of the problem occurance.

- Category 5 → 333 Occurrences → percentage of total occurrences = 333 ÷ 854 = 38.99 %
- Category 2 → 221 Occurrences → percentage of total occurrences = 221 ÷ 854 = 25.88 %
- Category 1 → 155 Occurrences → percentage of total occurrences = 155 ÷ 854 = 18.15 %
- Category 4 → 112 Occurrences → percentage of total occurrences = 112 ÷ 854 = 13.11%
- Category 3 → 33 Occurrences → percentage of total occurrences = 33 ÷ 854 = 3.86%

Lets create an excel worksheet and place this data into it, sorted high to low. Column one is the Defect category, column 2 is the frequency of occurrence, column 3 is the percentage from the above list.

Lets create one more column and place the cumulative percentage of the frequency. Notice that for the Category 5 the cumulative frequency percentage is same as the frequency percentage. For the next category Category 2, its the some of category 5 and 2 which amounts to 38.99+ 25.88 = 64.87. For the next category in list the cumulative is 38.99+ 25.88 + 18.15 = 83.02 and so on. Finally the last category, category 3 has a cumulative frequency percentage of 100%.

The below picture shows the screenshot of the excel table that we just created. We used “Format As Table” feature to format the data into a table so we can sort on the columns easily by clicking on the arrow next to the column headings in Excel.

Next thing we need to do is create a Pareto Chart to represent the above the data graphically. Pareto chart is a bar chart with line chart overlay-ed on top of the bar chart. The bar chart represents the categories with the frequencies in descending order. We use the left Y Axis to represent the values and X Axis to represent the categories. The line chart represents the “Cumulative Frequency percentage”. We used the secondary Y axis to represent the line chart values since the scales or ranges of these values do not match.

The above chart shows all the defect categories clearly in descending order in a bar chart along with the cumulative frequency of occurrence as a line chart with values on the secondary Y axis.

## How to do Pareto Analysis based on the above Pareto Chart

Pareto Analysis is analyzing the data from the above chart and finding out where the line graph crosses 80% mark on the secondary Y axis (right hand side). Then find out all the categories to the left of that point which are **“vital few”** or most significant factors. The remaining categories (or factors) are called **“Useful Many” **and they are less significant.

**Vital Few** = Categories with cumulative freq 80 below = Categories 5,2,1

**Useful Many** = Categories with cumulative freq 80 above = Categories 3,4

## Pareto Chart and Analysis Summary

- Pareto Charts help finding which issues are causing most problems
- Pareto Charts are used in root cause analysis
- Pareto Charts are a decision making tool and do not contain data such as detail data analysis and costs of failure.
- Pareto analysis results in finding the efforts where it will have the most impact.
- Pareto Charts decide the order in which the issues will be addressed.