80/20 Pareto Analysis

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80/20 Pareto Analysis
The Pareto Principle is also termed as 80/20 rule, principle of
1906, Vilfredo Pareto, the Italian economist, observed that 80% of the total land in Italy was being owned
by a mere 20% of the entire population. Later Joseph Juran, a renowned business management specialist,
developed the 80/20 principle through the observation that around 20% of the pea pods in his pea garden
contained about 80% of the total peas. He established the common thumb rule that 80% of the sales of an
organization came from about 20% of the clients
In truth, the number, 80%, does not have any magical significance. Hence, the theory was refined later to
contain a number k that varies between 50 and 100, when anything was shared among a large number of
participants. Thus, the k% was derived by (100
number of participants accounted for most of the resources. Many Pareto analysis systems started having k
as a factor that varied in this region, whenever intermediate imbala
Pareto also developed Pareto efficiency principle, which was only tangentially related to the 80/20
principle.
1.1. What problems are solved by this method?
Pareto applied this 80/20 principle to analyze the distributi
Later, the Pareto analysis was used to measure the economic inequality that was gradually widening in the
United States. In engineering control and computer technology also, the Pareto principle had been
successfully used to optimize efforts. Several other applications in various fields had been effected through
Pareto analysis.
1.2. How the method solves these problems?
Pareto established that nearly 80% of the wealth in Italy belonged to 20% of the total populati
among the ten wealthiest people in the world, the top three owned the same amount as the combined
amount of balance seven persons. In 1992, the United Nations released a Development Program Report
that showed the richest 20% had 82.70% of the glob
in 1989.
2. How to use the method step
The 80/20 rule is only a special result of the wider Pareto distributions phenomenon. The main parameter
that characterizes the Pareto index is
equation is applied, 80% of the effects arise from 20% of the causes.
with 80/20 but is extended further. This leads to calculations that 80% of 80%, which is 64
20%, which is 4%. Hence, we arrive at 64/4 rule. The next rule in this series is 51.2/0.8.
Further, it should also be noted that 80/20 rule need not add up to 100 in all situations. The 64/4 rule
derived above is another example of this point.
measure the various degrees of imbalance by the joint ratio principle. If the joint ratio is 95/5, then the
imbalance is very high, while 80/20 is significant imbalance. 70/30 is termed as moderat
55/45 is marginal imbalance. 50/50 automatically becomes even imbalance. Thus, the Pareto principle is
basically a principle of power law.
Normally, the step-by-step process in identification of causes through the use of Pareto analysis i
follows. 1) Forming a table that lists causes and their frequency as percentage of causes, 2) arranging the
rows with the most important cost as first, 3) adding a column of cumulative percentage, 4) plotting with
The comprehensive guide to business analysis methods
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80/20 Pareto Analysis
The Pareto Principle is also termed as 80/20 rule, principle of factor sparsity, and law of the vital few. In
1906, Vilfredo Pareto, the Italian economist, observed that 80% of the total land in Italy was being owned
by a mere 20% of the entire population. Later Joseph Juran, a renowned business management specialist,
developed the 80/20 principle through the observation that around 20% of the pea pods in his pea garden
contained about 80% of the total peas. He established the common thumb rule that 80% of the sales of an
organization came from about 20% of the clients in majority of instances.
In truth, the number, 80%, does not have any magical significance. Hence, the theory was refined later to
contain a number k that varies between 50 and 100, when anything was shared among a large number of
k% was derived by (100-k) % of the total number of participants, whenever a small
number of participants accounted for most of the resources. Many Pareto analysis systems started having k
as a factor that varied in this region, whenever intermediate imbalances in distribution were calculated.
Pareto also developed Pareto efficiency principle, which was only tangentially related to the 80/20
1.1. What problems are solved by this method?
Pareto applied this 80/20 principle to analyze the distribution of wealth and income among populations.
Later, the Pareto analysis was used to measure the economic inequality that was gradually widening in the
United States. In engineering control and computer technology also, the Pareto principle had been
lly used to optimize efforts. Several other applications in various fields had been effected through
1.2. How the method solves these problems?
Pareto established that nearly 80% of the wealth in Italy belonged to 20% of the total populati
among the ten wealthiest people in the world, the top three owned the same amount as the combined
amount of balance seven persons. In 1992, the United Nations released a Development Program Report
that showed the richest 20% had 82.70% of the global income, during world GDP distribution measurement
2. How to use the method step-by-step
The 80/20 rule is only a special result of the wider Pareto distributions phenomenon. The main parameter
that characterizes the Pareto index is assumed as . Further, is selected as
equation is applied, 80% of the effects arise from 20% of the causes. But this Pareto analysis does not end
with 80/20 but is extended further. This leads to calculations that 80% of 80%, which is 64
20%, which is 4%. Hence, we arrive at 64/4 rule. The next rule in this series is 51.2/0.8.
Further, it should also be noted that 80/20 rule need not add up to 100 in all situations. The 64/4 rule
derived above is another example of this point. Additionally, the Pareto analysis is effectively used to
measure the various degrees of imbalance by the joint ratio principle. If the joint ratio is 95/5, then the
imbalance is very high, while 80/20 is significant imbalance. 70/30 is termed as moderat
55/45 is marginal imbalance. 50/50 automatically becomes even imbalance. Thus, the Pareto principle is
basically a principle of power law.
step process in identification of causes through the use of Pareto analysis i
follows. 1) Forming a table that lists causes and their frequency as percentage of causes, 2) arranging the
rows with the most important cost as first, 3) adding a column of cumulative percentage, 4) plotting with
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factor sparsity, and law of the vital few. In
1906, Vilfredo Pareto, the Italian economist, observed that 80% of the total land in Italy was being owned
by a mere 20% of the entire population. Later Joseph Juran, a renowned business management specialist,
developed the 80/20 principle through the observation that around 20% of the pea pods in his pea garden
contained about 80% of the total peas. He established the common thumb rule that 80% of the sales of an
In truth, the number, 80%, does not have any magical significance. Hence, the theory was refined later to
contain a number k that varies between 50 and 100, when anything was shared among a large number of
k) % of the total number of participants, whenever a small
number of participants accounted for most of the resources. Many Pareto analysis systems started having k
nces in distribution were calculated.
Pareto also developed Pareto efficiency principle, which was only tangentially related to the 80/20
on of wealth and income among populations.
Later, the Pareto analysis was used to measure the economic inequality that was gradually widening in the
United States. In engineering control and computer technology also, the Pareto principle had been
lly used to optimize efforts. Several other applications in various fields had been effected through
Pareto established that nearly 80% of the wealth in Italy belonged to 20% of the total population. Even
among the ten wealthiest people in the world, the top three owned the same amount as the combined
amount of balance seven persons. In 1992, the United Nations released a Development Program Report
al income, during world GDP distribution measurement
The 80/20 rule is only a special result of the wider Pareto distributions phenomenon. The main parameter
. Further, is selected as = log
4
5 1.16. When this
But this Pareto analysis does not end
with 80/20 but is extended further. This leads to calculations that 80% of 80%, which is 64% and 20% of
20%, which is 4%. Hence, we arrive at 64/4 rule. The next rule in this series is 51.2/0.8.
Further, it should also be noted that 80/20 rule need not add up to 100 in all situations. The 64/4 rule
Additionally, the Pareto analysis is effectively used to
measure the various degrees of imbalance by the joint ratio principle. If the joint ratio is 95/5, then the
imbalance is very high, while 80/20 is significant imbalance. 70/30 is termed as moderate imbalance and
55/45 is marginal imbalance. 50/50 automatically becomes even imbalance. Thus, the Pareto principle is
step process in identification of causes through the use of Pareto analysis is as
follows. 1) Forming a table that lists causes and their frequency as percentage of causes, 2) arranging the
rows with the most important cost as first, 3) adding a column of cumulative percentage, 4) plotting with

The comprehensive guide to business analysis methods
Copyright AKS-Labs


Business Analysis Methods
Guide

causes in x-axis and cumulative perce
graph on the same graph, and 7) drawing a line parallel to x
dropped to x-axis is the separation of most important causes to the lef
right.
3. Pros and cons for this method
The advantage of Pareto analysis is that it is an effective and easy quantitative measurement tool that is
used to optimize resources to address business problems or to optimize e
activities. Hence, it is used in various statistical analyses to evaluate the relative importance of various
causes or factors and select the most advantageous one. At the same time, Pareto analysis had been found
to oversimplify many complex business aspects. Unless the analysts are aware of the exact levels, they
could end up with sub-optimal and wrong decisions. As such, Pareto analysis has certain limitations that
should not be ignored.
4. Best practices
Many organizations are using Pareto analysis and the 80/20 rule to achieve continuous improvements in
business processes. The input data could be all types of numerical data, such as rejection rates in a
production process, the value of stock items, etc. In the first case, you m
the rejections in the production process are caused by 20% factors. Hence, if these 20% rejection creating
factors are tackled and eliminated, the bulk portion of the rejection rates could be solved without hassle.
Similarly, you might come to realize that about 80% of the value of your stock items arises from 20% of the
total quantity of stock items. Hence, if you plan to increase your cash flow by reducing the stock value, you
should concentrate on reducing the inventory
might appear, since these 20% stock items might be crucial to continuous production. Hence, you should be
able to find out the optimum level of these items that would free your cash investme
production. You could prioritize several aspects of business, such as 80% profits coming from 20% of total
products, 80% of the raw materials are supplied by 20% of vendors, etc. and find out solutions to improve
the business processes and implement best practices.
5. Practices to avoid
A weapons system was continuously failing in the exercise units. The Pareto analysis was conducted with
errors by operating personnel as one category and mechanical failures as several sub
the mechanical failures were divided into different categories, none of them revealed higher level of failure
rates than the category of errors by personnel. Since the errors by personnel was much higher than all the
individual mechanical failures,
due to personnel errors, while the mechanical errors were the real cause of failure, when all sub
were combined. This kind of wrong assumption could lead to inappropriate
6. Summary
Vilfredo Pareto, an Italian economist, proposed in 1906 that 80% of the wealth in Italy was owned by 20%
of the total population. This was the birth of the Pareto analysis principle, also known as 80/20 rule, law
vital few, and principle of factor sparsity. Joseph Juran firmly established the Pareto analysis as a valuable
analytical tool in business processes and other decision making environments. Over the years, the Pareto
analysis was effectively applied to e
several other fields to optimize efforts successfully. United Nations established that 20% of the richest in
the world cornered 80% of global income. Similarly, three top wealthiest owned
collective amounts of the rest seven in top ten rich persons in the world.
The comprehensive guide to business analysis methods
AKS-Labs 2501 Blue Ridge Road
Suite 150 Raleigh NC 27607
axis and cumulative percentage in y-axis, 5) joining the points to create a curve, 6) plotting a bar
graph on the same graph, and 7) drawing a line parallel to x-axis at 80% in y
axis is the separation of most important causes to the left and the less important ones to the
3. Pros and cons for this method
The advantage of Pareto analysis is that it is an effective and easy quantitative measurement tool that is
used to optimize resources to address business problems or to optimize e
activities. Hence, it is used in various statistical analyses to evaluate the relative importance of various
causes or factors and select the most advantageous one. At the same time, Pareto analysis had been found
many complex business aspects. Unless the analysts are aware of the exact levels, they
optimal and wrong decisions. As such, Pareto analysis has certain limitations that
using Pareto analysis and the 80/20 rule to achieve continuous improvements in
business processes. The input data could be all types of numerical data, such as rejection rates in a
production process, the value of stock items, etc. In the first case, you might find out that around 80% of
the rejections in the production process are caused by 20% factors. Hence, if these 20% rejection creating
factors are tackled and eliminated, the bulk portion of the rejection rates could be solved without hassle.
y, you might come to realize that about 80% of the value of your stock items arises from 20% of the
total quantity of stock items. Hence, if you plan to increase your cash flow by reducing the stock value, you
should concentrate on reducing the inventory levels of these 20% of the stock items. This is not as easy as it
might appear, since these 20% stock items might be crucial to continuous production. Hence, you should be
able to find out the optimum level of these items that would free your cash investme
production. You could prioritize several aspects of business, such as 80% profits coming from 20% of total
products, 80% of the raw materials are supplied by 20% of vendors, etc. and find out solutions to improve
and implement best practices.
A weapons system was continuously failing in the exercise units. The Pareto analysis was conducted with
errors by operating personnel as one category and mechanical failures as several sub
the mechanical failures were divided into different categories, none of them revealed higher level of failure
rates than the category of errors by personnel. Since the errors by personnel was much higher than all the
individual mechanical failures, it was wrongly concluded that the failure of the weapons system was only
due to personnel errors, while the mechanical errors were the real cause of failure, when all sub
were combined. This kind of wrong assumption could lead to inappropriate conclusions in Pareto analysis.
Vilfredo Pareto, an Italian economist, proposed in 1906 that 80% of the wealth in Italy was owned by 20%
of the total population. This was the birth of the Pareto analysis principle, also known as 80/20 rule, law
vital few, and principle of factor sparsity. Joseph Juran firmly established the Pareto analysis as a valuable
analytical tool in business processes and other decision making environments. Over the years, the Pareto
analysis was effectively applied to economic inequalities, engineering control, computer, technology, and
several other fields to optimize efforts successfully. United Nations established that 20% of the richest in
the world cornered 80% of global income. Similarly, three top wealthiest owned
collective amounts of the rest seven in top ten rich persons in the world.
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axis, 5) joining the points to create a curve, 6) plotting a bar
axis at 80% in y-axis. 8) The intersection line
t and the less important ones to the
The advantage of Pareto analysis is that it is an effective and easy quantitative measurement tool that is
used to optimize resources to address business problems or to optimize energy levels to determine
activities. Hence, it is used in various statistical analyses to evaluate the relative importance of various
causes or factors and select the most advantageous one. At the same time, Pareto analysis had been found
many complex business aspects. Unless the analysts are aware of the exact levels, they
optimal and wrong decisions. As such, Pareto analysis has certain limitations that
using Pareto analysis and the 80/20 rule to achieve continuous improvements in
business processes. The input data could be all types of numerical data, such as rejection rates in a
ight find out that around 80% of
the rejections in the production process are caused by 20% factors. Hence, if these 20% rejection creating
factors are tackled and eliminated, the bulk portion of the rejection rates could be solved without hassle.
y, you might come to realize that about 80% of the value of your stock items arises from 20% of the
total quantity of stock items. Hence, if you plan to increase your cash flow by reducing the stock value, you
levels of these 20% of the stock items. This is not as easy as it
might appear, since these 20% stock items might be crucial to continuous production. Hence, you should be
able to find out the optimum level of these items that would free your cash investment without affecting
production. You could prioritize several aspects of business, such as 80% profits coming from 20% of total
products, 80% of the raw materials are supplied by 20% of vendors, etc. and find out solutions to improve
A weapons system was continuously failing in the exercise units. The Pareto analysis was conducted with
errors by operating personnel as one category and mechanical failures as several sub-categories. Since
the mechanical failures were divided into different categories, none of them revealed higher level of failure
rates than the category of errors by personnel. Since the errors by personnel was much higher than all the
it was wrongly concluded that the failure of the weapons system was only
due to personnel errors, while the mechanical errors were the real cause of failure, when all sub-categories
conclusions in Pareto analysis.
Vilfredo Pareto, an Italian economist, proposed in 1906 that 80% of the wealth in Italy was owned by 20%
of the total population. This was the birth of the Pareto analysis principle, also known as 80/20 rule, law of
vital few, and principle of factor sparsity. Joseph Juran firmly established the Pareto analysis as a valuable
analytical tool in business processes and other decision making environments. Over the years, the Pareto
conomic inequalities, engineering control, computer, technology, and
several other fields to optimize efforts successfully. United Nations established that 20% of the richest in
the world cornered 80% of global income. Similarly, three top wealthiest owned amounts equaling the

The comprehensive guide to business analysis methods
Copyright AKS-Labs


Business Analysis Methods
Guide

The Pareto index is assumed as
effects arise from 20% of causes. This had led to t
51.2/0.8 rules also. The step-
table is formed listing causes and frequency as percentage of causes, rows are arranged b
most important causes, cumulative percentage column is added, causes in x
percentage in y-axis are plotted and points are joined to crate a curve. Bar graph is plotted, a line is drawn
parallel to x-axis at 80% in y
important causes.
Pareto analysis helps in optimizing resources or energy levels to solve business problems or activities. Still,
it should be used carefully, since it oversimplifies most
possible. Several relational aspects of business processes like profits and products, raw materials and
vendors, rejection rates and factors, value of stock items and quantities, etc. could be successfully solv
optimize business resources and execute best practices. However, wrong categorizations could easily lead
to inappropriate conclusions and undermine the effectiveness of Pareto analysis.

The comprehensive guide to business analysis methods
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Suite 150 Raleigh NC 27607
The Pareto index is assumed as and is selected as = log
4
5 1.16. This equation shows that 80% of
effects arise from 20% of causes. This had led to the 80/20 rule. It had been extended further to 64/4 and
-by-step process in Pareto analysis to identify the causes consists of 8 steps. A
table is formed listing causes and frequency as percentage of causes, rows are arranged b
most important causes, cumulative percentage column is added, causes in x
axis are plotted and points are joined to crate a curve. Bar graph is plotted, a line is drawn
axis at 80% in y-axis and line dropped from intersection separates more important and less
Pareto analysis helps in optimizing resources or energy levels to solve business problems or activities. Still,
it should be used carefully, since it oversimplifies most complex aspects and sub
possible. Several relational aspects of business processes like profits and products, raw materials and
vendors, rejection rates and factors, value of stock items and quantities, etc. could be successfully solv
optimize business resources and execute best practices. However, wrong categorizations could easily lead
to inappropriate conclusions and undermine the effectiveness of Pareto analysis.

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. This equation shows that 80% of
he 80/20 rule. It had been extended further to 64/4 and
step process in Pareto analysis to identify the causes consists of 8 steps. A
table is formed listing causes and frequency as percentage of causes, rows are arranged beginning with
most important causes, cumulative percentage column is added, causes in x-axis and cumulative
axis are plotted and points are joined to crate a curve. Bar graph is plotted, a line is drawn
nd line dropped from intersection separates more important and less
Pareto analysis helps in optimizing resources or energy levels to solve business problems or activities. Still,
complex aspects and sub-optimal decisions are
possible. Several relational aspects of business processes like profits and products, raw materials and
vendors, rejection rates and factors, value of stock items and quantities, etc. could be successfully solved to
optimize business resources and execute best practices. However, wrong categorizations could easily lead
to inappropriate conclusions and undermine the effectiveness of Pareto analysis.

The comprehensive guide to business analysis methods
Copyright AKS-Labs


Business Analysis Methods
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More in the full version of the Business Analysis
Methods Guide:
29 page SWOT guide

Alternative methods to SWOT analysis
Steps in solving problems using Porters Five Forces for Competitive Position
Solving problems using the SWOT analysis
Result
SWOT analysis: conclusions
SWOT FAQ
SWOT checklist
21 PowerPoint templates
presentation
32 page PEST Analysis Guide (Adobe PDF file)
Introduction to the method and problem of PEST
PEST and SWOT
PEST and its extensions
Step-by-step guide on how to use PEST for solving business problems
Key success factors of PEST
Examples of real-life usage of PEST
Conclusions
PEST FAQ
Checklist for PEST
Other aspects related to PEST
Review of the most popular business analysis methods
The review includes introduction to the method, step
practices.
80/20 Pareto Analysis (4 page)
Break-even Analysis (4 page)
Competitive Analysis (4 page)
Key Ratio Analysis (3 page)
PEST Analysis (3 page)
SWOT Analysis (4 page)
Variance analysis (4 page)
"What if..." simulation (4 page)
Learn more online: http://www.measurebusiness

The comprehensive guide to business analysis methods
AKS-Labs 2501 Blue Ridge Road
Suite 150 Raleigh NC 27607
More in the full version of the Business Analysis
Guide:
SWOT guide (Adobe PDF file):
Alternative methods to SWOT analysis
Steps in solving problems using Porters Five Forces for Competitive Position
Solving problems using the SWOT analysis - 5 examples in format: Problem, Response with SWOT,
SWOT analysis: conclusions
templates (.pptx file; check examples below) for SWOT analysis
32 page PEST Analysis Guide (Adobe PDF file)
roduction to the method and problem of PEST
PEST and its extensions
step guide on how to use PEST for solving business problems
Key success factors of PEST
life usage of PEST

Other aspects related to PEST
Review of the most popular business analysis methods
The review includes introduction to the method, step-by-step algorithms, pros and cons, best
80/20 Pareto Analysis (4 page)
even Analysis (4 page)
Competitive Analysis (4 page)
Key Ratio Analysis (3 page)
PEST Analysis (3 page)
SWOT Analysis (4 page)
Variance analysis (4 page)
"What if..." simulation (4 page)
http://www.measurebusiness.com/
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More in the full version of the Business Analysis
Steps in solving problems using Porters Five Forces for Competitive Position
5 examples in format: Problem, Response with SWOT,
(.pptx file; check examples below) for SWOT analysis
step guide on how to use PEST for solving business problems
Review of the most popular business analysis methods
step algorithms, pros and cons, best