A Pareto diagram is a quality control tool used by businesses and other organizations. These diagrams help businesses make decisions that allow them to get the greatest possible benefit from the minimal amount of resources or effort. By using resources efficiently, the business can keep costs down and maximize profits.
The Pareto diagram, or Pareto chart, is named for Italian economist Vilfredo Pareto. During the 19th century, Pareto posited that 20 percent of the population holds 80 percent of the wealth within a nation. This concept became known as the Pareto principle, or 80/20 rule. Over time, people in other fields began to apply the 80/20 rule to other disciplines. For example, business experts may believe that 80 percent of customer complaints come from 20 percent of a firm's customer base.
By constructing a Pareto diagram, the business can choose among options that will help it best improve the company. These diagrams incorporate both a standard bar chart and a line graph. For a basic example, consider a firm trying to improve customer retention by addressing consumer complaints. Along the bottom axis of the Pareto diagram, the firm would list all the standard complaints it receives. The most common complaint, or that reported by the highest number of customers, would be listed first, followed by the remaining complaints in order of frequency.
Along the left vertical axis of the bar chart, users would list numbers representing the frequency of these complaints. The Pareto diagram also requires a vertical axis to the right of the graph, which represents the percentage of total complaints each issue represents. The bar chart should be created so that each bar shows the frequency of each complaint, with the bars shown in descending height from left to right.
Next, a point is placed above each issue. This point represents the percentage of total complaints that this issue represents. By connecting all the points, users can see which issues account for the greatest percentage of consumer problems.
By examining a completed Pareto diagram, users can quickly spot which issues can be tackled using the 80/20 rule. In many cases, addressing just 20 percent of issues will eliminate 80 percent of customer complaints. This helps the business determine where to direct its resources to get the most bang for the buck. It also represents the best way to retain customers and minimize the cost of addressing complaints based on a limited supply of time and resources.