Pareto Principle

Pareto Principle - Application in Problem Analysis and Operations Management

Pareto problem analysis and pareto charts are based on the Pareto principle which is named after Italian economist Vilfredo Pareto. The application of the Pareto principle in problem solving and analysis can provide a great starting point with simple data analysis of process, plant failure or production data to provide an early insight into problem causes and effects without intense or complex analysis. The pareto principle is also referred to as the 80-20 rule.

For those not familiar with the Pareto principle, it states that 80% of effects or consequences are the result of only 20% of causes. This principle has been widely observed in business and around socio economic issues in many industries and parts of the world. For example in many cases 80% of business revenue is usually achieved through only 20% of products or 80% of problems in a process such as waste or production downtime are caused by only 20% of the causes.

Pareto Principle in Operations Management

The Pareto principle can be observed and is applied in some lean concepts and operations management tools such as ABC Warehousing, production downtime, production planning, statistical quality control, supply chain design and other operations management areas. In all these cases 80% of the issues, plant throughput, deviations, and sales volumes are in most cases caused by only approximately 20% of the product range, possible causes, or faults. This principle can provide a starting point and economical problem/issue resolution approach of the most common problems in a production plant, business or process. A few of the areas where this rule applies are listed below.

Warehousing & Logistics

The layout of an efficient and well planned warehouse may use several logistics techniques; one of the most common is ABC warehouse methodology which divides products to be shipped into three categories: A, B and C products. “A” type products are the most commonly sold and loaded onto trucks or shipped. These products usually make up 60-90% of sales but are only 20-30% of the product range the business sells. These products should be stored as close and convenient as possible to the shipping dock or processing station as it will take less time to process orders and fewer movements around the warehouse. This type of setup is always being optimized in large warehouses where product ranges are in the thousands such as large online stores which have substantial warehouse and logistics operations.

Plant Maintenance and Reliability

In processing plants such as in mines that process ore after it is extracted, plant reliability and proper maintenance is very important due to the large economic cost of plant failures and related downtime. Also, due to their remoteness and large scale equipment, logistical issues also arise in sourcing plant and equipment. It is for these reasons that companies in these heavy industries have large maintenance teams (maintenance planners, reliability engineers, mechanical and electrical engineers, etc) that analyse plant failures and breakdowns. It is very common to see these maintenance teams perform Pareto studies on plant failures by compiling plant downtime data, investigating actual root causes and if they are due to mechanical or electrical plant failures these are logged for later analysis.

The results can be compiled onto a Pareto chart that will usually highlight a handful of causes for the majority of these failures; again the 80-20 rule is very commonly encountered. By initially focusing on the handful of results that cause the majority of breakdowns maintenance teams can put monitoring, preventive and reliability programs in place to service the plant preventatively at appropriate intervals.

Production Planning

In a production environment production schedules will also usually follow the 80-20 rule as in many companies the bulk of the sales comes from a handful of product lines which are commonly called “bread and butter products”. Therefore scheduling production will usually revolve around these production lines, and is common that production commences with these products and then switches to similar products to minimize production downtime, waste, tool and settings changes.

The Pareto principle has many uses and applications throughout the field of business and operations management as mentioned above, therefore making the pareto analysis and associated Pareto charts a common, efficient method of obtaining a first cut overview and analysis of most problems.