Pareto analysis emerged from Vilfredo Pareto‘s observation that many activities break down to an 80:20 ratio, where 80% of production is due to 20% of contributing factors. This observation is now being used to focus business strategies, problem solving and operations on the key inputs that account for 80% of the outcome.
How Does The 80/20 Rule Works?
The 80/20 principle is applicable to both positive and negative situations, offering a helpful way to deal with problems or opportunities rapidly. In other words, by identifying the few key factors that contribute greatly to a scenario, we can better focus efforts in order to obtain the required result Pareto analysis is only as good as the data used.
We need to ensure that all contributing factors are identified and that the parameters and measures that are suitable and revealed are properly defined and interpreted. Although not all fall neatly into Pareto law, analyzing Pareto is still useful in identifying the main causal factors.