Q 620. 80/20 is the governing rule behind Pareto Plot. However, practically you might never be able to get the exact numbers. Then what is the significance of the 80/20 rule?

 

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The term 80/20 states that 80% of any failures happened are due to 20% of the causes in any process. For example, in service based industry the parts returned are analysed with major categories as damage, missing, functional failure, No failure found and it is easier to find the root cause which is contributing to the major failures,

In order to understand this question first we need to understand where this Pareto originated from. A Famous Italian economist named Vilfredo Pareto stated the Pareto principal when he observed that top 20% of population of his country are holding approximately 80% to total wealth (Vital Few, Trivial many). Later this concept was widely used in Quality Control when they observed defects also follow similar pattern as stated by pareto principal. Few problems leading to several parts rejections.  

Commonly referred as 80/20 rule is just a representation. So cases can be 90/10 and some may follow 70/30. The concept its still the same the small amount of population is holding large amount of wealth.

Example

See below graph after seeing this you can decide, what should be your first priority to work on. Small amount of problems are causing larger rejections. Pareto chart will give us what should we concentrate more on to get the rejections under control.

 

The 80/20 rule or Pareto principle was named after velfredo perato .

That principle states that 80% of problems are caused by 20% of Cause.

That means for each and every problem 80% losses are due to 20% of reason.

Ex-80% of the business are due to 20% of the client.

 This principle helps us to find the critical X for Out put.

By using perato principle we can find the critical root causes to work on for improvement and improve the bottle necks.

Example

In a manufacturing industry the total breakdown is of 40h

By doing the 80/20 analysis we came to see that only 2 reason that is 22% of total are having 80% of the breakdown time of total time.

The Italian economist Vilfredo Pareto stated that 80% of the wealth of Italy was owned by 20% of the population of Italy. 

 

IMHO, this became such a hit that the thought leaders cutting across many industries,  started applying  this in a business context, as a rule and proclaimed that 80% of the issues/problems in their ecosystem, are created by 20% of the causes. The idea was not to proclaim the exact numbers or percentage. But to portray the fact that the majority of the issues/problems are created by few of the major causes. That's how the 80/20 rule is applied in the business context. 

 

Conclusion:  In reality, this is how the pattern looks in a typical data distribution  

 

Reference Link: Wikipedia.org (for ascertaining the actual fact)

According to the Pareto analysis, 80 percent of the problems are because of top 20 percent causes. Or in other words, 20 percent of the reasons cause 80 percent of the consequences.

 

One must not be adamant to be saying that 80:20 principles means actually 80:20, that is not correct. Realistically 70:30 also gives or portrays a better picture if one needs to eliminate maximum causes/reasons. Whether 80:20 or 70:30 or 60:40, the onus lies in fixing what has been the source of problems and must be eliminated as quickly as possible.

 

Now, 80:20 is just a decebt indication to tell one that major problems are caused by a few reasons , however it depends on business appetite whether they need tight specs or broad specs using 90:10, 80:20, 70:30 or any other combination.

 

 

 

Pareto analysis is used to plot total % of contributing factors which impact all the outcomes. And 80/20 rule in Pareto basically a standard assumption that 20% of the contributing factors impact 80% of the outcomes. 

 

This is just a standard assumption though the rate may vary a little but in most cases it's very close. 

 

So 80/20 Pareto rule helps focus on top priorities to focus on to gain maximum outcomes. 

Let us please get acquainted with the Pareto Chart first. Lean Six Sigma practitioners use this bar chart often to concentrate on the most important parameters that contribute to a problem. It assists us to arrange all the improvement projects we may be currently considering to execute in the decreasing order of their importance and as we execute these projects, it assists us to consistently monitor the progress we make. 
Let us now understand a little bit about the presentation of the chart. The bars in this chart are always arranged in decreasing order of magnitude such that the tallest bar highlights the parameters that have the highest priority. The total percentage of the effect is plotted as a line as well , enabling us to gain knowledge about the percentage of contribution of each effect to the total effect.
Commonly, practitioners call the practical demonstration of this chart as Pareto Principle or Rule. It is called a principle or rule since it has been so widely observed in all spheres of life that is almost seen as a phenomenon. The phenomenon we are talking about is that approximately 80% of effects in a scenario are resultant from 20% of the causes. Hence, Pareto Principle is commonly also called the 80/20 Principle or Rule.
 

In the 80/20 Pareto concept, only a small portion (20%) of causes are responsible, for a portion (80%) of effects. To gain an understanding of these causes we can use a tool called the Pareto chart.

 

When working on improvement projects following this rule helps us prioritize issues that have the most impact on the outcome i.e looking for the critical Xs. 

Pareto charts prove useful when identifying issues from a list in an FMEA (Failure Mode and Effects Analysis). It's important to note that for effectiveness we should ensure that these issues don't overlap and that our sample size is adequately large.

 

However, it's essential to acknowledge that the 80/20 rule is a theoretical concept. It may oversimplify business situations and does not apply universally in all contexts.

 

There are instances where this principle may not be applicable as a tool;

• Projects with more than 20% of important issues
• Issues with varying levels of importance where not all issues carry the same weightage.
• Different outcomes are possible ie. effort and impact may differ across issues.

Because of the limitation of any one tool, when it comes to improvement projects, it's recommended to assess the best approach to prioritization and not rely solely on the 80/20 rule.

Most of the respondents have answered it correctly. Pareto is used as a prioritization tool i.e. to focus on the critical areas which when worked upon have a potential to give a big benefit. Adil Khan has given the best answer to the question.

 

Also read the answer from Aarti. She has highlighted areas where Pareto cannot be used.