What is Pareto Analysis and how is it used in Lean Six Sigma?

Lean Six Sigma is a globally recognised process improvement methodology that helps businesses increase revenue, reduce costs and improve efficiency.

It incorporates a number of principles and theories taken from other areas, such as finance, including the Pareto Principle.

What is the Pareto Principle?

The Pareto Principle dates from 1897, when an Italian economist called Vilfreda Perato analysed the distribution of wealth in his country. He came up with the theory that 20% of the population held 80% of the income. Renowned quality management leader Dr Joe M. Juran first applied to theory to other areas of business and society during the 1940s.

Although it is often known as the 80/20 principle, these proportions are not set in stone. The most important point is that a large proportion of results come for a small proportion of cases. For example, a company may earn 80% of its profits from 20% of its sales.

How is the Pareto Principle applied in Lean Six Sigma?

Lean Six Sigma uses ‘Pareto Charts’ to visualise where the bulk of the problems or opportunities in a process originate. The theory is that by tackling the largest source of inefficiency first, companies can make the biggest improvements with the minimal amount of effort.

Pareto charts can be used to answer questions such as:

•          What are the biggest issues affecting our team or business?
•          Where are we losing the largest amount of sales?
•          How can we improve the quality of our products?
•          How can we improve customer service?
•          Which web pages are most important to our business? (e.g. attract 20% of traffic)

For example, you could plot the reason for complaints along the X axis of a graph and the number of complaints that fall under each category along the Y axis. This will clearly display the biggest reason for customer complaints and, therefore, the area the business needs to tackle first to improve its service.

Why is the Pareto Principle important for business?

As you can see from the above, Lean Six Sigma principles incorporated into business strategy can improve an organisation’s efficiency, no matter which industry it operates in.

The Pareto Principle enables managers and staff alike to:

•          Look at problems from a new perspective
•          Visualise the issues that need to be addressed first
•          Optimise marketing and sales strategy
•          Strategically tackle inefficiencies
•          Analyse changes in the business over a period of time
•          Assess the effect of changes to the organisation or product

Gain the skills to improve efficiency and profitability

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Discover more about Lean Six Sigma courses and how they can benefit you on our IASSC page.

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