Pareto Diagram: 5 steps to do it and how to apply it in your business


pareto diagram


Interested in using the Pareto diagram? First used in 1941, this tool has gained popularity in the corporate world, especially because, as a statistical technique, it allows enterprises to identify which processes can lead to success by facilitating decision-making.

Thus, it has become an indispensable quality management tool for leaders and managers in need of solving routine problems.

In this previous post about Pareto Analysis, we conceptualized and demonstrated the advantages of this methodology. Now, it’s time to learn how to put it into practice, using this step-by-step on how to make a Pareto diagram.

If you would like to enhance your company’s performance, keep reading this article to find out how the Pareto diagram can help your business.

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What is the Pareto diagram?

The Pareto Diagram uses graphic resources to establish an 80/20 ratio to complete the relationship between different situations. It applies the following logic:usually, 80% of the problems are concentrated in 20% of the causes. As a result, if you focus on solving those causes, your company’s main problems could be resolved.

Check out these examples of Pareto’s law:

  • 80% of customer complaints come from 20% of products/services and employees;
  • 80% of delivery delays stem from the 20% of possible reasons for delays;
  • 80% of the company’s billing comes from 20% of its workforce;
  • 80% of your profit comes from 20% of your products or services;
  • 80% of the total cost of your stock stems from just 20% of the products.

In the early 20th century, and based on his observations, Italian economist Vilfredo Pareto concluded that 80% of his country’s wealthness came from just 20% of the population.

As he continued his research, Pareto discovered that this fact was also true for other countries. Following this logic, we can bring this analysis into the business context.

In the 1940s, Joseph Juran documented and formalized the use of this diagram in the entrepreneurship world.

When to use the Pareto Chart in your company?

The Pareto Diagram is a useful tool for prioritizing highest importance items within a certain context.

It offers an in-depth analysis of the frequency in which these issues occur, so you can break down the overall causes.

By using a Pareto Diagram, your company can identify, for example, its main internal problems, in order to create an action plan to solve them.

In addition, it takes into account the number of issues and their probability of occurrence, as well as the magnitude of the impact of each problem or point of improvement identified. Thus, by using this tool, your company will work in a more intelligent and intuitive way, leaving aside less impactful actions.

To ensure effective strategy implementation, maintaining fluid communication among all members of the organization is crucial, as collective decision-making is essential.

Pareto diagram in business management

To successfully apply the Pareto diagram to your business management, you must pay attention to two types of issues when analyzing the chart: “vital few” and “trivial many”.

The vital few issues are related to a small group of problems that result in big and important losses.

On the other hand, the trivial many belong to the group of problems that cause little losses.

Therefore, one significant advantage of implementing the diagram in your company’s management is its ability to identify these two groups, enabling effective prioritization when addressing them, such as utilizing a GUT matrix for problem-solving purposes.

Building a Pareto chart step by step

By using this tool you can gain insight into the 20% of efforts that generate 80% of improvement in your company’s management. Thus, it is possible to reduce costs, minimize losses, increase profits, eliminate waste and retain customers.

However, to create and apply a Pareto diagram effectively, it is necessary to follow this five steps:

1. Define your goal

The first step for achieving expected results when applying the Pareto Diagram is to clearly define your objective, that is, what you want to accomplish based on a fact. For instance, you can choose an issue based on its frequency of occurrence.

Here are some insights you can choose from to help you solve different types of problems:

  • Eliminate waste across different sectors;
  • Reduce operational costs;
  • Balance stock levels;
  • Minimize customer complaint rates;
  • Improve the company’s organizational climate.

In summary, you can use this method for several objectives in your decision- making process. It is necessary to identify the greatest challenges faced by your company before proceeding to the next step.

2. Data collection

Once the objective of your Pareto Diagram is well-defined, it is necessary to collect all related information and data.

For example, if you are looking into the reasons behind the increase in customer complaints and cancellations, it is essential to gather all the information on the matter.

Analyzing data over a significant period is recommended, preferably a minimum of four months, to avoid data distortion.

3. Categorize the problems

Using the case mentioned above -finding the problems that generate customer complaints- it is important to categorize the problems found, such as service failure or issues with the product or service itself.

This allows data analysis to be more accurate and agile, revealing, for example, that 20% of a specific complaint contributes to 80% of all complaints filed.

4. Create a data table

After gathering all this information for your Pareto Chart, you organize it in a table format.

In the table, you should include all the identified problems, their possible causes and the accumulated percentage this represents. The next step is to arrange the table in descending order. Then, it is necessary to add a column to indicate the cumulative percentage of each occurrence.

5. Pareto Diagram: Identifying the 20% generating 80% of results

Once all the data is available and easily visualized through the table, analyze the frequency of each problem occurrence and measure its impact on the company’s overall results.

These insights are incredibly valuable, as they allow you to identify the customer segment that consumes your product or service the most and the profiles with the highest complaint rates. Armed with this information, you can devise intervention strategies to mitigate the factors influencing these complaints.

Additionally, when you find out which audience corresponds to 80% of your sales, this valuable and strategic information allows you to always keep a high profitability through targeted marketing and sales techniques.

Next steps

Throughout this article, it is possible to notice that the process of creating the Pareto Diagram is quite simple. Although the theory seems complex, it does not take great skills and knowledge to put it into practice.

This could be even simpler when you use a strategic planning system application, which helps to increase, engage and boost your results, with visual resources that improve the company’s strategic deployment.

Applying this business management system, you can monitor corporate performance and centralize all indicators, focusing on decision making.

Therefore, if you are looking for a software that efficiently organizes managers and incorporates all these features, including the Pareto diagram, you need to try out STRATWs One:

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