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Pareto Analysis

Choosing the Most Important Changes to Make

Pareto analysis is a very simple technique that helps you to choose the most effective changes to make.

It uses the Pareto principle – the idea that by doing 20% of work you can generate 80% of the advantage of doing the entire job*. Pareto analysis is a formal technique for finding the changes that will give the biggest benefits. It is useful where many possible courses of action are competing for your attention.

How to Use the Tool:

To start using the tool, write out a list of the changes you could make. If you have a long list, group it into related changes.

Then score the items or groups. The scoring method you use depends on the sort of problem you are trying to solve. For example, if you are trying to improve profitability, you would score options on the basis of the profit each group might generate. If you are trying to improve customer satisfaction, you might score on the basis of the number of complaints eliminated by each change.

The first change to tackle is the one that has the highest score. This one will give you the biggest benefit if you solve it.

The options with the lowest scores will probably not even be worth bothering with – solving these problems may cost you more than the solutions are worth.

Example:

A manager has taken over a failing service center. He commissions research to find out why customers think that service is poor.

He gets the following comments back from the customers:

1. Phones are only answered after many rings.
2. Staff seem distracted and under pressure.
3. Engineers do not appear to be well organized. They need second visits to bring extra parts. This means that customers have to take more holiday to be there a second time.
4. They do not know what time they will arrive. This means that customers may have to be in all day for an engineer to visit.
5. Staff members do not always seem to know what they are doing.
6. Sometimes when staff members arrive, the customer finds that the problem could have been solved over the phone.

The manager groups these problems together. He then scores each group by the number of complaints, and orders the list:

• Lack of staff training: items 5 and 6: 51 complaints

• Too few staff: items 1, 2 and 4: 21 complaints

• Poor organization and preparation: item 3: 2 complaints

By doing the Pareto analysis above, the manager can better see that the vast majority of problems (69%) can be solved by improving staff skills.

Once this is done, it may be worth looking at increasing the number of staff members. Alternatively, as staff members become more able to solve problems over the phone, maybe the need for new staff members may decline.

It looks as if comments on poor organization and preparation may be rare, and could be caused by problems beyond the manager's control.

By carrying out a Pareto Analysis, the manager is able to focus on training as an issue, rather than spreading effort over training, taking on new staff members, and possibly installing a new computer system.

Key points:

Pareto Analysis is a simple technique that helps you to identify the most important problem to solve.

To use it:

• List the problems you face, or the options you have available
• Group options where they are facets of the same larger problem
• Apply an appropriate score to each group
• Work on the group with the highest score

Pareto analysis not only shows you the most important problem to solve, it also gives you a score showing how severe the problem is.

*This is only one application of this important 80/20 principle. It shows the lack of symmetry that almost always appears between work put in and results achieved. This can be seen in area after area of competitive activity. The figures 80 and 20 are illustrative – for example, 13% of work could generate 92% of returns. Vilfredo Pareto was an Italian economist who noted that approximately 80% of wealth was owned by only 20% of the population. This was true in almost all the societies he studied.

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In the next article we look at Paired Comparison Analysis, a helpful tool for working out the importance of different factors. To read this, click "Next article" below. Other relevant destinations are shown in the "Where to go from here" list underneath.

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