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Pareto Analysis

Pareto analysis is a method of reviewing the issues that your business faces and prioritising them so that you get maximum results from minimum effort.

 

What is Pareto Analysis?

Pareto Analysis is a technique that can be used to help to prioritise possible actions in a business. It does this by identifying what problems will be solved by taking the proposed actions and this helps to identify which actions will improve the situation.

It comes from the Pareto principle and the aim to identify the 20% of work that might be needed to generate 80% of the required results.

How to Apply the Pareto Analysis

Step 1

Identify all the problems you are trying to solve in your business. Talk to as many people as you can, not just employees, but customers, suppliers and anyone else that may have useful insights.

Step 2

For each of these problems, you need to identify the root cause of the problem. This can take some time and may require different methods of analysis.

Step 3

Now you need to allocate a score to each of the problems you have identified. This score will depend on the type of problem. For example, if you are looking into customer satisfaction, you might score them by considering the reduction in customer complaints if you solved the problems. If you are looking at improving sales, you might score them on the amount of revenue you could make if you solved them.

Step 4

Now you need to put all your problems together and group them by root cause. So if you have several problems that have a root cause related to IT issues, put them together.

Step 5

Add up the scores for each group of problems for each root cause. So if you have three problems with a root cause in IT issues, with scores of 10, 6 and 5, the total score for IT issues as a root cause is 21. You can then prioritise your problems by focusing on the highest scored issues first.

Step 6

Take the appropriate action to deal with the causes of your problems. You may have some root causes that score so low that they are not worth the time or financial cost of solving.

 

The example below illustrates the process:

You are running a mobile phone retailing business. You have identified your problems, root causes and scored them as follows:

PROBLEM ROOT CAUSE SCORE
(no. of complaints)
Some staff don’t know enough about the phones they are selling Training 17
Customers return phones that are not working as they expected Product Quality 28
Staff are unable to process the orders correctly Training 9
Some phone orders disappear in the system and are lost IT Issues 3
Customer details are duplicated in the system IT Issues 2
Customers want phones with higher spec than you have available Product Quality 15

The Outcome

Looking at the total scores for each root cause we find the following:

Product quality issues were the cause of 43 complaints

Training issues were the cause of 26 complaints

IT issues were the cause of 5 complaints.

So by working on the product quality issues alone, you have the potential to address 58% of the complaints. If you can address the training issues as well, you have dealt with 93% of the complaints. You may decide that you can live with IT issues at the moment, depending on the cost of fixing them.

Conclusion

By carrying out the Pareto Analysis, you will ensure that you spend your time on the issues that are having the biggest effect on your business. However, you should be aware that this process doesn’t explicitly take into consideration the cost of solving the problems. Cost is likely to be a factor in any business, so you will need to include this in your thought process when it comes to prioritising which problems to solve.

 

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