# Pareto Chart

Skill level: Basic

#### Description

A Pareto chart is used to identify the categories of factors that are most likely to account for the behavior of a variable affecting a process or the result. Process improvement teams use Pareto charts to prioritize their efforts.

In a Pareto chart, vertical bars typically represent each category, and a cumulative line chart above the bars identifies the factors most likely to be significant targets for study.

#### Benefits

• Simple tool to use and understand
• Helpful in identifying areas to focus efforts
• Displays data in a straightforward, easy to analyze, and easy to communicate manner

#### How to Use

• Step 1.  Clearly determine the purpose of the analysis. Common themes include decreasing defects, reducing cycle time, reducing expenses, and increasing productivity or utilization.
• Step 2.  Develop a list of categories that the project team believes influence the behavior under study.
• Step 3.  Develop a standard unit of measurement (minutes, dollars, people-hours, etc.) and the timeframe for analysis. Then, collect the data.
• Step 4.  Tally the frequency or determine the magnitude for each category and list in decreasing order. Calculate each category as a percentage of the total and add the second category to the first, and so on, for each category to create a cumulative percentage that totals 100 percent. For insignificant categories, grouping and totaling together and displaying as an “other” category can be useful.
• Step 5.  Plot categories on the x-axis, units of frequency or magnitude (defects, minutes, dollars, etc.) on the left y-axis, and percentages on the right y-axis.
• Step 6.  In decreasing order from left to right, plot the vertical bars on the x-axis. The size of the bar should correspond to the left y-axis.
• Step 7.  Plot the data point for each category that corresponds to the percentage on the right y-axis. Connect the dots with a straight line to create a line chart.
• Step 8.  Analyze the diagram by identifying the categories that appear to account for most of the effect. This is typically indicated above the category where the line graph starts to flatten quickly or is around the 80 percent level.

Not Applicable

#### Example

A credit card company was attempting to understand why a high percentage of credit cards were not being activated by its customers. The process improvement team chose to study 90 days of transactions.  They found errors related to the cards that were not activated, as illustrated in the table below. Then, they determined the percentage of the total for each category and the cumulative percentage.

The team grouped the smallest three categories that accounted for < 5% (incorrect credit limit, wrong color card, and incorrect credit insurance option) into an “other” category and created the chart below.  After analyzing the Pareto chart, the group decided to focus their efforts on “name misspelled,” “address incorrect,” and “wrong phone number,” which accounted for roughly 80% of the total.

« Back to Glossary Index