Pareto Chart: Find its Meaning and Learn to Create One

Learn how to create and interpret Pareto Charts to focus on what matters most in your projects and enhance productivity. Ideal for quality management and data analysis enthusiasts.

Combining line and bar graphs, a Pareto Chart sheds light on the relative priority of data you have and need to prioritise first. It is one of the important seven basic quality tools proposed by Japanese professor Dr Kazuo Ishiguro. In quality management, this diagram helps decide the starting point for fixing the biggest problems first. It follows the Pareto Principle or the 80/20 rule, which states 80 percent of outcomes come from 20 percent of causes.

What is a Pareto Chart?

A Pareto Chart visually represents values in descending order, with a curved ascending line showing the running percentage sum from left to right. The bars on the left are the tallest, representing the data's most problematic elements. And they must be prioritised. The ones to the right keep becoming shorter, representing that they are less critical in priority. While the line shows the percentage that has been added up so far across a set of values.

Explaining the Pareto Distribution Diagram

This chart is also called the Pareto Distribution Diagram, it consists of the following components. 

• X-Axis - The horizontal axis contains bars, which represent the factors causing the most problems, in descending order. 
• Y-Axis - The vertical axis is the representation of how often each factor or category occurs
• Z-Axis - The line shows how much the factors add up in total. According to NLM, once this line reaches 80%, it means that the first 20% of factors (the vital few) are causing most of the issues. 

Why is a Pareto Chart Used?

Concentrating on the most significant factors on the left-hand side of the graph makes it easier to reach the best outcomes. So, when there are many problems, instead of spending effort on all of them equally, it is best to focus on the most critical problems first. The other lesser problems can be looked after later. 

In an organisation, when the levels of management are well-defined, the Pareto Chart is very helpful in communicating the areas that need the most attention to upper management. 

How to Create a Pareto Chart

Here is the Pareto Chart procedure with an example. 

Gathering Data

If you have data on a spreadsheet, you may skip this step. 

But if you do, start with the focus on collecting raw data. This data should be the factors that are causing bottlenecks. 

Then, they should be in categories, and the data collection method should be unbiased. 

Let’s say you are gathering data on the problems in a manufacturing unit. The defect type or the categories could be scratches, dimension errors, and so on. 

Preparing Data

Once you have the data, you must reorder them from highest to lowest, typically on an Excel sheet. 

Defect Type	Frequency
Scratches	25
Dimension Errors	15
Missing Parts	10
Machine Failures	8
Packaging Issues	5

In this case, the scratches in the manufacturing unit are the most recurring defect type of all. 

Calculate the Cumulative Percentages

Now, it’s time to calculate the cumulative percentage. For each, you would have to do it.

On an Excel spreadsheet, you can use the following formulae

For individual percentage

= (B2 / SUM($B$2:$B$6)) * 100

For cumulative percentage

= SUM($C$2:C2) 

(When moving to the next row in the same column, the value of the formula will change to (B3/SUM($B$2:$B$6))*100, in the case of Individual Percentage. For Cumulative Percentage, the formula will be = SUM($C$2:C3). Keep changing the parameters, B4 and C4, as you go down). 

Place this formula in the D Column, considering you have placed the Defect Type, Frequency, and Individual Frequency on columns A, B, and C, respectively.

Once done, the cumulative percentage is the sum of the percentages up to that point.

It should look something like this. 

Defect Type	Frequency	Individual Percentage	Cumulative Percentage
Scratches	25	39.68253968	39.68253968
Dimension Errors	15	23.80952381	63.49206349
Missing Parts	10	15.87301587	79.36507937
Machine Failures	8	12.6984127	92.06349206
Packaging Issues	5	7.936507937	100

Create the Chart 

After the calculation, you just need to highlight the data in Excel. 

Click on Insert. 

Following that, if you are using Excel 2016, click on Insert Statistic Chart. Choose Pareto. 

When Not To Use Pareto Chart

The Pareto chart provides the causes of the problems but may not effectively offer solutions. It can be used with other root cause analysis tools, like the fishbone diagram. 

Sometimes, there can be other subcauses that may be hidden from an initial data collection. So there is a huge potential of overlooking them. 

Also, it looks into historical data, which is ineffective in industries that are fast changing in the dynamic business environment, focusing on emerging tech.  

Pareto Chart Best Practices

Following these practices will help you make the best of a Pareto Chart. 

1. Make sure your data comes from reliable sources and is free from errors.
2. Present data clearly and consistently, avoiding mixed scales or misleading visuals.
3. Include only relevant data related to your problem or analysis.
4. Don't take data at face value; check its quality and ensure it meets valid standards.