What is Pareto chart? Currently Pareto is a charting format that can bring great analytical advantages to investors. However, not everyone knows how to use this chart to accurately analyze the collected data. Let's discover more about how to apply Pareto chart with Viindoo through the following article content.
1. What is Pareto chart?
Pareto chart (Pareto Chart) is a bar graph with columns of data arranged in order from lowest to highest. The data in the graph will reflect the collected data in the most realistic way, so that the user can determine the defect that needs to be solved. Pareto chart is one of 7 basic tools of quality.
2. Why you should use Pareto chart
In general, Pareto chart has great use in business administration and investment, as well as market analysis in particular. Pareto chart can help you:
- Classify important factors and defects that need to be prioritized, helping users evaluate and improve work performance.
- Optimize the process of increasing productivity.
- Risk management for businesses, hence giving predictions for the right solutions.
Identify defects accurately, thereby saving time and costs. - Determine sustainable development direction for businesses.
Pareto charts are very useful in helping users to analyze the market.
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3. Advantages of Pareto chart
Pareto charts not only benefit each business but also individuals in an organization, ranging from leaders to employees.
- Benefits for businesses: The use of Pareto charts supports to build financial and human resource allocation plans, and helps orient the company to develop stably. In addition, knowing the issues that need to be prioritized also helps the company reduce costs and time while improving work efficiency.
- Benefits for leaders: Pareto charts help leaders understand the development and operation of the business.
- Benefits for employees: The chart helps identify the tasks that need to be solved and develop a clear assignment plan, thereby improving efficiency in the operation process
Pareto charts benefit businesses and individuals in the business.
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4. How to build and analyze Pareto charts
Below are the steps to create, build and analyze Pareto charts:
4.1 How to build a Pareto chart
In order for the Pareto chart to reflect the data in the most realistic way, the charting process needs to be done carefully. Following are the steps to buld a Pareto chart with illustrative images.
Step 1: Create a data table of existing defects with corresponding occurrences:
The data table contains the defects with their respective occurrences
Step 2: Sort the defects in descending order based on the number of times the defect occurs
Sort the defects in descending order.
Step 3: Calculate the cumulative rate value for each defect
The formula for calculating cumulative value is:
Defect x cumulative = Defect x-1 cumulative + Defect x
When applied to the data table we will have:
- Defect 2 cumulative = Defect 2 = 2607
- Defect 1 cumulative = Defect 2 cumulative + Defect 1 = 2607 + 1003 = 3610
In turn the final result will be:
Calculate the cumulative value of each defect
Step 4: Calculate the cumulative percentage for each defect
Since the Pareto chart uses percentages to represent the data collected, you need to calculate the cumulative percentage for each defect using the following formula:
% Defect 1 = (Cumulative 1/Sum of Cumulative) x 100%
E.g.
% Defect 1 = (3610/4802) x 100% = 75%
After calculating the percentage data, we will have the following result:
Calculate the cumulative percentage of each problem
Step 5: Create a Pareto chart
Create a Pareto chart will be done in the following steps:
- Select the data to create the columns Detect, Frequency of Detect, and Cumulative%
- Select Insert → Charts → Stacked column
You must first create a column chart with a stacked column graph.
After selecting, the chart will be displayed as follows:
Stacked column Pareto chart.
Next, convert the cumulative column into a Line graph by clicking on the chart and right-click, then select Change Chart Type, select the combo item and change the cumulative column to a Line graph (linear graph).
Change column Cumulative% to Line graph.
After converting, our chart will look like this:
Charts include Column and Line graphs
Next, split the scale of the Accumulate% item to the right axis by clicking on the Line graph → Right click → select Format Data Series → Secondary Axis
Split scale for graph Cumulative%
After that, our chart will have the following form.
Result after the steps of creating a Pareto chart
The next step will be to adjust the max and min values of the two graph columns. While the left axis will have a Max value of the total number of occurrences of problems and a Min value of 0, the right axis will have a Max value of 100% and a Min value of 0%. Adjust the value by selecting the left or right axes → right click → choose Format Axis.
The next step is to adjust the values for both vertical axes.
The next step is to pull one end of the linear graph to zero by inserting a row with the value 0% in the data table. Then select the graph → right click → Select Data → select Accumulate% → Edit → Reselect the data range.
Pull one end of a linear graph to zero.
Next, you can adjust the presentation of the graph to be more vivid and intuitive with the following methods:
- Select each chart and right click → Add data label to display the data.
- Increase the width of the column by right-clicking on the column → Choose Format Data Series → Gap Width = 0.
- Align the column and line graphs so that both graphs correlate by clicking Graph → Layout → Axes → Secondary Horizontal. Right-click the column name row above, choose Format Axis → Axis Position → On tick marks. Then choose Labels → Labels Position → None.
After performing the above charting steps, we will have the following results:
Pull one end of a linear graph to zero.
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4.2 How to analyze a Pareto Chart
When analyzing Pareto charts, we will use the 80/20 rule which means that 20% of the problems lead to 80% of the consequences. The way to analyze the chart will be done as follows:
- From the right percent vertical axis we draw a line starting from the 80% position until we touch the Line graph.
- From the position where the two lines meet, we continue to draw a line perpendicular to the horizontal axis.
Then we will get the following graph.
Pull one end of a linear graph to zero.
From this graph we can infer that problems to the left of the line perpendicular to the horizontal axis will cause 80% of the consequences and need to be solved first.
5. Application of Pareto Chart
Pareto charts are often used in analyzing multi-factor events and determining the influence of that factor. Pareto charts help to select which defect needs to be prioritized to be resolved, helping managers control the company in the most efficient manner.
Many businesses find themselves in a situation where they have found their biggest problems and their causes but don't know where to start. Making a Pareto chart will help businesses cut down on redundant elements and know important issues. From there, this will optimize the resource allocation plan, helping to reduce costs and time.
Using a Pareto chart helps to identify which problems need to be prioritized for resolution.
In addition, this graph can also be used as an effective communication tool for superiors or investors. With graphical visualizations, leaders will better understand the reasoning behind your business growth decisions.
The content of the above article has provided sufficient information for the question of what is Pareto chart, the use of a Pareto chart as well as how to create a Pareto chart correctly. Viindoo hopes that this shared information will be useful in the process of business development.
