Pareto principle
The Pareto principle (80-20 rule) is an economic rule observed by Vilfredo Pareto. Vilfredo noted that 80% of the property in Italy was 20% owned by the population. But the 80-20 rule proved to be applicable to many more areas, according to Joseph Juran. Juran noted that 80% of outcomes can be explained by 20% of causes. An example would be that 80% of the chemical industry is caused by 20% of the processes. In a business way, you get the equations:
- 20% of your customers provide 80% of your sales
- 20% of complaints come from 80% of your customers
- 20% of your results come from 80% of your work
Pareto effect ratio
Of course, the Pareto ratio 80-20 is not correct in every equation, but the principle that a large portion of results come from a small portion of effort and vice versa. The ratio can also be 75-25 or 130-60, as long as you have an understanding of how the Pareto principle applies in your business. You can do this by looking at what results (outcomes) come from what work (causes). If you are aware that 20% of your assortment accounts for 80% of sales, it makes sense to always stock these products.
Pareto analysis
Using the Pareto effect, you can use Pareto analysis. It can be used in several areas. In this example, we are going to talk about complaints. 20% of the root causes of complaints cause 80% of the problems. When this is made transparent, the process can be optimized. In this example, there are a total of 54 complaints. Then you create categories under which the complaints can fall. This example is about a restaurant with 5 categories of complaints:
- Quality of food and drink 19x 36% 36%
- Service from staff 12x 22% 58%
- Waiting time 9x 17% 75%
- Interior of restaurant 8x 14% 89%
- Menu card 6x 11% 100%
Above you can see the absolute amount of complaints, the complaints divided into percentages and cumulative percentages. The analysis then shows that a large portion of the problems can be solved by solving complaints 1, 2 and 3. This analysis can be used primarily for large issues.
