What is Pareto Analysis and how do you use it?
There are a lot of things you need to do in business and a lot of problems you need to solve. So, where do you prefer to start first between many problems or works? Given that your time is also valuable, it would be wise for you to start with the problems that have the biggest impact on your company. But at this point, how do you decide which problem to solve with first? That’s exactly why we can use Pareto analysis to maximize our productivity while we set up our business plan.
What is Pareto Analysis?
Pareto Analysis is a simple and useful decision-making technique used to assess problems that are competing with each other and to measure their impact on your company. It allows you to focus on solutions that will give you the most positive contribution, and it aims to maximize your productivity.
Pareto Analysis uses the Pareto Principle, also known by Italian economist Vilfredo Pareto as the “Rule of 80/20” in 1896 in his book “Cours d’économie politique”. Pareto Analysis is also known as the 80/20 rule.
What is Rule 80/20?
Vilfredo Pareto, studied the map of Italy in detail at the time and, based on this, revealed the 80/20 principle. He realized that 80% of Italy’s land belongs to 20% of the population. Later, he continued to investigate in other areas based on this. He said this logic is consistent, especially in the economy. Of course, having him as an economist is a very important factor here. Vilfredo Pareto has tried to explain this predictable imbalance with the 80/20 rule. That is, 80% of the results were caused by 20% of the reasons. In this policy, the rates do not necessarily have to be 80% to 20%. It can also show variability of 70% to 30%, 90% to 10%.
Based on this rule, which is the basis of Pareto Analysis, we can explore 20% of the factors that make up 80% of the results. By increasing this 20%, we can use our time efficiently and improve the efficiency of our results with this logic. The 80/20 rule can fix problems in a company by strategically choosing those to have the most impact. It can help promote creative thinking and organized thinking in business innovation or problem solving. This rate is not fixed, and it actually represents the underlying logic. So how do you apply Pareto Analysis?
Pareto Analysis Steps
- Identify and list the issues that must be addressed.
You should start by defining all the jobs you need to solve first. Write down all the jobs and problems you need to do on a blank sheet of paper. You can get help from customers, teammates, complaints, and various surveys for business-related problems.
- Think about the cause of each problem.
Think deeply about why the problem occurred and all the factors that caused it. Write down this root cause for each problem.
- Rate each problem.
Rate each of the issues you listed in order of importance. The scoring method you use may vary depending on the type of problem you are trying to solve.
For example, if you want to increase your profits, you need to solve problems with points based on their costs. Or, if you are trying to increase customer satisfaction, you can earn points based on the number of complaints you have received about each of them.
- Group the problems.
Group the problems by taking them into the same group for their reasons. This way, you’ll discover the most difficult point for you.
- Rate the groups.
Now rate each group you have defined. The group you have given the highest score has the lowest priority, and the group you have given the lowest score has the lowest priority.
- It’s time to take action.
Starting with the group you scored high in, you can increase your productivity. By not wasting energy on your low-priority problems, you will first solve your priority problems. If we use the manicent of Pareto analysis, we can achieve efficient results by using the factors correctly.
An Example of Pareto Analysis
The example below comes from a mobile phone service provider. The data is collected from the customer review forms sent after the preference to leave the mobile phone operator. To improve their bids, the company decides to perform Pareto analysis on the data to understand what they should focus on first.
As you can see, most complaints (about 80%) are either due to long wait times or rough customer service. 80% can be seen in the graphic below, highlighted by the dotted line.
In terms of business strategy, these two issues must be addressed first to achieve the best impact. Based on reviews, let’s assume that hiring more staff and/or getting better education is the best way to go.
The Benefits of Pareto Analysis
It enables you to increase business efficiency.
Pareto analysis lets you change your company’s focus, prioritize your problems, and identify the root causes of these problems. Companies are more efficient when they focus on efforts where they will see the biggest return on investment.
It develops problem-solving skills.
Pareto analysis allows you to organize business issues into an open set of reasons and effects that you can address individually.
It improves decision making.
Employees and businesses can use Pareto analysis to decide which applications are most effective and how to improve existing operations. Learn how benchmarking can help improve operations.
It improves time management.
You can use Pareto analysis to see in more detail the effectiveness of changes you have made or need to make to improve your business applications. Pareto analysis assists you in managing changes and the time spent implementing them.
It helps with planning, analysis, and troubleshooting.
You can use Pareto analysis to plan and troubleshoot changes you can make to your business applications.
It shows the collective impact of problems on the works.
Since Pareto analysis is versatile and applies to multiple business areas, it provides an overview of the overall impact of challenges across the entire organization. This will help you and your company’s other decision makers determine what problems to solve first.
Pareto analysis benefits both companies and employees at many points in decision making and time management. You can use Pareto analysis to identify and solve problems in your company in the most efficient way. It will help you manage your time efficiently by spending your energy on solving your priority problems.