BPM Library

The blog includes information from the materials that I meet during my career. It is a collection of information about methods and library sources for professionals in the IT Business Analysis sector.

What?

The name "Pareto" is derived from the name of founder of the theory "Vilfredo Pareto" on which Pareto chart works. Vilfredo Pareto was an economist who gave the theory that in certain economies the majority of the wealth is held disproportionately by a small segment of the population.

The Pareto principle was brought in Quality by Joseph M. Juran. The Pareto chart is a quality tool that is mainly used to graphically segregate out the "Vital few from Trivial many". The Pareto principle is based on 80/20 rule which states that 80% of the problem are due to 20% of the causes.


The figure given below represents the Pareto diagram/Chart. The first three defects represent the vital defects as they constitute 80% of the total defects.


How?

Step 1 - Categorize the data (e.g. by defect type)
Step 2 - Determine the way to compare relative importance (e.g. it can be on financial basis, frequency basis)
Step 3 - Rank the categories from most important to least important
Step 4 - Find the percentage frequency for each category.
Step 5 - Compute the cumulative frequency in the order they are ranked
Step 6 - Plot bar graph showing the relative importance of each category in descending order.
Step 7 - Identify the vital few by the 80 - 20 rule.


Ground Rules?

Percentage: In the bar graph percentage and not the actual value has to be plotted
Cumulative: The 80% has to be considered for the cumulative percentage. It is not that accurately 80% has to be taken, something less or graeter can also be taken

Merits?

It helps in prioritizing the problem and help management identify the problems that require immediate attention
Pareto chart can also be used to compare the condition before and after the implementation of solution for improvement
"After" improvement Pareto chart can be used to see the impact of the remaining problems
Pareto Chart helps the management in allocating the limited resources to problem solving

Demerits?

If categorization is not done correctly than the Pareto can be misleading in the way that resource being spent on trivial problem instead of vital.

1 comments:

http://www.valuestreamguru.com/?p=133
http://www.youtube.com/watch?v=TBtGI2z8V48&feature=player_embedded

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