How to make a Pareto diagram step by step and apply it to your business

Managing a company is always a great test. The numerous responsibilities and challenges of an entrepreneur require that you develop multiple skills and pick up new knowledge. One of them is how to make a Pareto diagram step by step.

Used for the first time in 1941, this tool has gained notoriety in the corporate world. This is especially because it is a statistical technique that identifies which processes can lead to the success of an enterprise, facilitating the decision-making of managers.

In the previous post on Pareto Analysis, we conceptualized and demonstrated the advantages of the Pareto methodology. Now, you will learn how to apply Pareto in practice. 

For today’s post, we have the tutorial on how to step by step make a Pareto diagram.

If you feel that the performance of your company is not as satisfactory as it could be, continue reading this article. You will discover how making a Pareto chart can help your business.

For the understanding of this content to be appreciated, it is important to recall the essence of the Pareto Analysis. It emerged based on an observation by the Italian economist Vilfredo Pareto. The analysis named after its creator concluded that 80% of Italian income came from only 20% of the population.

As he continued his research, he discovered that this was also the case in other countries. So, bringing this analysis into the business universe, it is possible to conclude some questions, see these examples of Pareto’s law:

80% of customer complaints stem from 20% of products/services and employees;

80% of the delays in deliveries come from 20% of the possible reasons for delays;

80% of the company’s turnover 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 comes from only 20% of your products.

What we can deduct from these examples of the Pareto principle is: the Pareto methodology states that 80% of your results can be directly associated with only 20% of the factors capable of leading to that result.

Thus, Pareto’s Theorem could be stated as follows:

20% of the causes are responsible for 80% of the effects.

How to make Pareto diagram step by step

From understanding the concept of how to set up a Pareto chart, we can conclude the power of this business management tool. Through it, the administrator can define which are the best strategies (20%) to generate great results (80%).

In other words, the application of this tool allows management to assess which 20% of effort generates the 80% of improvement in the management of your company. With this, it is possible to reduce costs, minimize losses, increase profits, eliminate waste and retain clients.

However, for this to be possible, it is necessary to follow some important steps. Check out how to make the Pareto diagram in 5 steps:

1. Define your objective

The first step to achieving good results when applying the Pareto methodology is to clearly define your goal. With the Pareto Analysis, you can:

Eliminate waste in some sectors;

Reduce the operational costs of the business

Balance stock levels;

Minimize customer complaint rates;

Improve the company’s organizational climate.

In short, it is possible to use this method for countless objectives. All that is needed is to identify the company’s greatest flaws and difficulties and move on to the next step.

2. Do the data survey

Once the objective has been defined, you should gather as much information about it as possible. If you are trying to find the reasons for the increase in customer complaints and cancellations, for example, it is essential to gather all the relevant information about it.

Make an analysis based on a certain period. Ideally, this period should not be too short, as this would generate distortion in the data. Due to this, it is recommended that it should be at least 4 months.

3. Categorize the problems

Using the example just mentioned – finding the problems that generate customer complaints -, it is important to separate the found problems by categories, such as the failure of customer service and the problems with the product/service itself.

This measure makes the data analysis much more agile and precise. It can help you conclude that 20% of a certain complaint can lead to 80% of all complaints.

4. Make a table with the data

After gathering all the information, it is necessary to transfer it to a table. 

In the table, you should enter all the problems encountered, all their possible causes, and the percentage this represents. The next step is to arrange the table in descending order. After, you must add a column that determines the accumulated percentage of each occurrence.

5. Find the 20% that corresponds to 80% of the results

With the data in hand and easily viewed through the table (or graph), all you have to do is analyze how often each problem repeats itself. With that, you should measure what kind of impact it has on the company’s results.

The conclusions are so revealing that, in the case under analysis, it is possible to identify the type of customer that most consumes your product/service and the client profile that complains the most. With this information, it is possible to plan and outline intervention strategies, seeking to minimize the factors that influence these complaints and problems.

For example, when you find out the cohort that corresponds to 80% of your sales, you have in your hands valuable and strategic information. After all, knowing where your greatest profitability comes from is a way to keep it always high, through focused marketing and sales techniques.

You already know how to make a Pareto chart, but do you know more about this academic? Then check out this infographic.

What you learned about how to make a Pareto chart

As you can see, the step by step for Pareto Analysis is quite simple. Although the theory seems complex, it does not require great skills and knowledge to put it into practice.

Therefore, after reading all this information, any administrator knows how to make a Pareto diagram and can perform this analysis and achieve better strategic and efficient management.

So have you managed to learn how to make a Pareto diagram step by step? If you found today’s post interesting and want to receive our blog updates first hand, just subscribe to our newsletter! It’s fast and free!

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