Pareto's Principle

[BillRotando]

I saw the reference to Pareto's principle and was not familiar with it, so I looked it up. It makes so much sense! I looked around for more information and I found this fairly concise description on a management web site. I thought it was really clear and wanted to share with others here. Hope others find it as interesting and informative as I did.

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In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. In the late 1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto's Principle. While it may be misnamed, Pareto's Principle or Pareto's Law as it is sometimes called, can be a very effective tool to help you manage effectively.

Where It Came From

After Pareto made his observation and created his formula, many others observed similar phenomena in their own areas of expertise. Quality Management pioneer, Dr. Joseph Juran, working in the US in the 1930s and 40s recognized a universal principle he called the "vital few and trivial many" and reduced it to writing. In an early work, a lack of precision on Juran's part made it appear that he was applying Pareto's observations about economics to a broader body of work. The name Pareto's Principle stuck, probably because it sounded better than Juran's Principle.

As a result, Dr. Juran's observation of the "vital few and trivial many", the principle that 20 percent of something always are responsible for 80 percent of the results, became known as Pareto's Principle or the 80/20 Rule.

What It Means

The 80/20 Rule means that in anything a few (20 percent) are vital and many(80 percent) are trivial. In Pareto's case it meant 20 percent of the people owned 80 percent of the wealth. In Juran's initial work he identified 20 percent of the defects causing 80 percent of the problems. Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consume 80 percent of your time and resources. You can apply the 80/20 Rule to almost anything, from the science of management to the physical world.

You know 20 percent of your stock takes up 80 percent of your warehouse space and that 80 percent of your stock comes from 20 percent of your suppliers. Also 80 percent of your sales will come from 20 percent of your sales staff. 20 percent of your staff will cause 80 percent of your problems, but another 20 percent of your staff will provide 80 percent of your production. It works both ways.

How It Can Help You

The value of the Pareto Principle for a manager is that it reminds you to focus on the 20 percent that matters. Of the things you do during your day, only 20 percent really matter. Those 20 percent produce 80 percent of your results. Identify and focus on those things. When the fire drills of the day begin to sap your time, remind yourself of the 20 percent you need to focus on. If something in the schedule has to slip, if something isn't going to get done, make sure it's not part of that 20 percent.

There is a management theory floating around at the moment that proposes to interpret Pareto's Principle in such a way as to produce what is called Superstar Management. The theory's supporters claim that since 20 percent of your people produce 80 percent of your results you should focus your limited time on managing only that 20 percent, the superstars. The theory is flawed, as we are discussing here because it overlooks the fact that 80 percent of your time should be spent doing what is really important. Helping the good become better is a better use of your time than helping the great become terrific. Apply the Pareto Principle to all you do, but use it wisely.

Manage This Issue

Pareto's Principle, the 80/20 Rule, should serve as a daily reminder to focus 80 percent of your time and energy on the 20 percent of you work that is really important. Don't just "work smart", work smart on the right things.

[chris payne]

Nice post Bill. How about Pareto charts? Are they related to this principle? Any idea how they are used?

[BillRotando]

Hey, I told you I was no expert. I just posted some info on the Pareto that I found on a web site. Maybe others here can answer your questions.

[Paris K.]

A Pareto chart, named after Vilfredo Pareto, is a type of chart that contains both bars and a line graph, where individual values are represented in descending order by bars, and the cumulative total is represented by the line. Pareto charts are extremely useful for analyzing what problems need attention first because the taller bars on the chart, which represent frequency, clearly illustrate which variables have the greatest cumulative effect on a given system or process.

A Pareto chart can be used to quickly identify what issues need attention. By using hard data instead of just guessing, there can be no question about what problems are influencing the outcome most significantly. In the example below, a software company was seeing a steady decline in business. Initially, the general manager of the company assumed that the problem was that the software design was not attractive and it run very slow. After performing a customer survey and charting the frequency of the responses, it was very clear that the real reasons for the decline of his business had little to do with the attractiveness and the speed of the program. By collecting the survey data and displaying it in a Pareto chart, the manager could see what was having the most influence on the declining business, for example, an outdated database, infrequent updates and price/cost are contributing 80% to the total number of dissatisfied customers. Following the Pareto Principle, those are the areas where the manager should focus his attention to build his business back up.

The 80%/20% Pareto Principle areas are also highlighted in the example below, to denote the areas of significant and insignificant impact.

pareto2.png (22.46 KiB) Viewed 23273 times

[Tina.Robertson]

Paris K., although simplistic, I like your example about using the Pareto Chart. If anyone is interested, here is a link to an article with step-by-step instructions on how to create a similar Pareto chart.

http://www.projectsmart.co.uk/pareto-an ... y-step.php I have also attached a short PDF that has some more details on using the principle.

BTW, I have been applying the 80/20 Pareto Principle in all my 20+ years in high tech. I live by it and it has never let me down

[NewAgile]

Thanks to all the contributors, this is great! I am finding so much helpful information here, it's awesome. I had heard the Pareto principle thrown about and had no idea what it was, never mind how to use it. Now I know.