What is a Pareto chart? Process for creating charts and notes when applying

Pareto chart is a commonly used chart type today because of its advantages for investors and businesses in many fields. However, not everyone knows how to take full advantage of this chart. In the article below, 1C Vietnam will provide information about the concept and role of the Pareto chart as well as the simple process of creating a Pareto chart. Refer now!

1. What is a Pareto chart?

The Pareto chart was introduced by Vilfredo Pareto, an Italian economist, philosopher, and sociologist. He was the first to introduce the concept of the 80/20 rule of Pareto efficiency. That means 80% of problems occur because of 20% of the root causes. To put it another way, executing 20% of the work helps achieve 80% of the benefits compared to completing the backlog.

Later, the concept was put into application by expert in the field of quality management and control Joseph Juran. Pareto charts are used mainly in the fields of economics and health.

This principle is not accidental but has been proven through the analysis of hundreds of charts of businesses to date. With this principle, businesses can focus resources on solving the biggest risks that affect the entire project. Since then, other outstanding tasks have also been resolved quickly.

2. The role of Pareto chart for businesses

Pareto charts can bring many benefits to businesses, including leadership teams, senior managers and employees.

1- For leaders: Pareto charts help leaders have an overview of issues in the organization. Thereby, managers can make more accurate decisions as well as propose effective strategies for using resources.

2 - For employees: Pareto chart helps employees arrange problems by priority. From there, employees can build appropriate plans to focus on factors with greater impact as well as achieve high efficiency at work.

3 - For organizations: Pareto chart helps identify core issues that need to be prioritized. Through analysis results, businesses can promptly solve problems, restrain influence and prevent domino effects. If positive development factors are identified, businesses need to have a plan to focus resources to bring the business to more sustainable development.

3. When should Pareto chart be used?

The Pareto chart plays an important role in identifying the root cause of problems in a business. However, not all cases can apply the Pareto chart. Below are some cases where businesses can use Pareto for analysis:

• When analyzing the frequency of problems or causes within a process.
• When a business has many problems but wants to focus resources on solving core problems.
• When it is necessary to learn and explain factors affecting business operations.
• When businesses need to perform general cause analysis by considering specific factors.

4. The process of creating a Pareto chart with Excel is simple

Excel is one of the effective support tools in creating Pareto charts. So how to create a Pareto chart in Excel. Let's learn the steps below!

4.1 Step 1: Determine the data that needs to be collected over a specific time

To create a Pareto chart in Excel, you need to prepare data over a specific time. Managers can create a spreadsheet and insert the necessary data.

4.2 Step 2: Sort the data in ascending order and calculate the percentage of each factor

Perform Home ⇒ Sort & Filter ⇒ Sort largest to smallest to sort data in descending order of value.

4.3 Step 3: Draw Pareto chart with Excel

To draw a Pareto chart in Excel, the user needs to calculate some of the following data:

1 - Calculate the percentage of each factor

Create a third column in the spreadsheet to perform percentage calculations of factors. You can take the individual value of each factor and divide it by the value of the total of all factors.

2 - Calculate cumulative value

Create a fourth column to calculate the cumulative percentage of each factor. In which, the first factor has a cumulative percentage equal to the calculated percentage in column 3. Factors then, the implementer uses the formula below:

After completing the input and calculation steps, the user selects the data area to represent and then operates Insert ⇒ Insert Chart ⇒ Clustered Column ⇒ OK . Once the Pareto chart has been obtained, the implementer can make customizations such as axis names, titles, and colors to suit the needs.

4.4 Step 4: Analyze Pareto chart

From the right axis, the user will draw a straight line at 80%, going horizontally. From the intersection of the graph and the line, draw a line perpendicular to the line just drawn and parallel to the % axis. At this point, the administrator can clearly see that to the left of this perpendicular line are 80% of the problems that need to be focused on solving.

5. Note when applying the Pareto chart to make decisions

Although the Pareto chart can bring businesses many great benefits, it is not always necessary to use this chart because there are simple problems that can be solved immediately. The Pareto chart should only be used when the problem is complex and large and the important cause cannot be found. At this time, Pareto will help businesses identify and overcome the causes that create the greatest impact.

The Pareto chart plays a very important role for businesses in determining the root cause of the problem, thereby focusing resources on thoroughly solving it. Hopefully through this article, your business will have more useful knowledge as well as how to draw Pareto charts in Excel. Your business can also refer to 1C Vietnam's comprehensive management software to better support operations related to business operations and development. If you have any questions, please contact us for support.