Thursday, October 16, 2014

Practical applications of Pareto Principle

A strange economic principle first outlined by an Italian Professor Vilfredo Pareto (1848-1923) discovered an imbalance in the distribution of wealth and income in nineteenth century England. Vilfredo Pareto is widely known for his law of income distribution. In the 1860s, he found that the majority of the wealth and income went to a minority of people. In percentage terms 80 percent of the income and wealth went to 20 percent of the population.
The Pareto rule is the observation that if you divide the world into causes and results, relatively few causes (roughly 20 percent) nearly always lead to most of the results (roughly 80 percent). It is the observation that a small number of events give rise to the majority effects. Most consequences come from few causes. The great majority of outputs come from a small minority of inputs. In an industrial world, Pareto’s rule was found to apply in an increasing number of situations. Pareto’s rule is a fact of life in the world of selling and sales force management: 80 percent of sales are made by 20 percent of the sales force. Project managers know that 20 percent of the work (the first 10 percent and last 10 percent) consume 80 percent of one’s time and resources. The value of the Pareto principle for a manager is that it reminds one to focus on the 20 percent that matters.

Pareto’s principle, 80/20 rule should serve as a daily reminder to focus 80 percent of one’s time and energy on the 20 percent of one’s work that is really important. Moreover many researchers have confirmed that the rule applies to many other phenomena, including the distribution of measured defects. For instance, it has been found that 80 percent of the observed defects on a product or in a process can be attributed to 20 percent of the possible causes. The 80/20 principle asserts that 20 percent of products, customers or employees are really responsible for about 80 percent of profits. Living the 80/20 way enables anyone to get extraordinary results without extraordinary efforts. In a way this leads to the idea of achievement islands which means that the small time periods when you are in your most productive or creative.
     A small amounts of our energy – leads to – most great things in our lives.
    A small portion of our time- leads to- most of our happiness and fulfillment


Pareto’s rule states that a small number of causes are responsible for a large percentage of the effect, in a ratio of about 20:80. This means that for many phenomena, 20 percent invested inputs are responsible for 80 percent of the results obtained. In another words 80 percent consequences originate from 20 percent of the causes. The 80/20 rule means that a few (20 percent) are vital and many (80 percent) are trivial. Dr. Joseph M. Juran called Pareto principle as the ‘vital few and trivial many.’ Joseph Juran popularized the Pareto principle in the 1950s by showing that it can be applied to a variety of situations, especially quality problems. The rule is also called ‘the law of the vital few’ or the principle of factor sparsity.
For example IBM found that, on average, 80 percent of the run time of a software application is due to only 20 percent of the lines of code. This realization helped them streamline the most important lines of code and speed up their applications by working on the lines of code that were 16 times (20 %) as important. According to factor 16, the individuals in the 20- percent group are 16 times as important as those in the 80- percent group.

Pareto analysis

Pareto charts are one tool we can use to help us be more effective in tracking down the sources of problems and focusing our efforts where they will have the biggest effect. This is known as pinpointing or localizing, a problem. Pareto charts break a big problem into its parts and identify which parts are most important. A Pareto chart is a special kind of bar chart where each bar represents a different category or part of a problem. The tallest bars on the chart represent that parts that contribute the most to the problem. By focusing our efforts on the tall bars, we can usually get the most from limited resources and maximize our gains. That is because usually it takes just as much effort to cut the tallest bar in half as it does to cut the smallest bar in half.

Pareto thinking

The 80/20 rule asserts that approximately 80 percent of the effects generated by any large system are caused by 20 percent of the variables in that system. The 80 percent of a product’s usage involves 20 percent of its features. In a city’s traffic control system, 80 percent of a city’s traffic is on 20 percent of its roads. The 80 percent of your website traffic comes 20 percent of your pages. The 80 percent of a company’s revenue comes from 20 percent of its products. In a company or industry, 80 percent of innovation comes from 20 percent of the people. The 80 percent of your success comes from 20 percent of your efforts.   The 80 percent of your problems are a result of the same 20 percent of your issues.  In machinery, 80 percent of errors are caused by 20 percent of the components. In an organization, 80 percent of its progress comes 20 percent of the effort. Out of 100 % of the people, 20 percent are making 80 percent of the difference. The other 80 percent make 20 percent of the difference. Top 20s have a better way of thinking, learning and communicating. The 80 percent of our happiness or success is tied to the 20 percent of the inside world. The 80 percent of the profits in an endeavour will be derived from 20 percent of the segments (or client groups). In general 20 percent of your clients yield 80 percent of your profits. Below   20 percent of your total number of friends contribute the great majority of happiness and meaning to life. In summary, a small number of events give rise to the majority of effects. Most consequences come from few causes.

Practical applications

Personal productivity – The 80 percent of one’s time is spent on the trivial many activities. But in order to improve your productivity, you concentrate on the vital 20 percent. The key is to identify those vial few activities, actions, products or programs.
Costs – to reduce costs, identify which 20 percent are using 80 percent of the resources.
Customer profitability – In most successful companies, some customers can be more profitable than others. Many companies struggle to measure the profitability of customers, distributors or agents. If they use 80-20 strategy, such companies can definitely profit from their customer portfolio.
                               ‘Critical few and trivial many’
                                     Achieve more with less

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