Reviewed by Sep 30, 2020| Updated on
Pareto analysis is a business decision-making methodology, which is based on the 80-20 rule. This is a technique of decision making that objectively distinguishes a small number of input variables as having the greatest effect on an outcome, whether desired or not.
Pareto analysis is based on the assumption where it is possible to obtain 80% of the profit of a project by doing 20% of the work or, conversely, 80% of the issues are attributed to 20% of the causes.
When following the 80-20 rule, it is possible to sort out issues based on how they impact earnings, consumer concerns, technological difficulties, product failures, or delays and backlogs due to missed deadlines. Each of these things earns a ranking depending on the amount of revenue or profits, and the amount of time spent or the number of complaints. A simple breakdown of the steps may comprise:
Not all issues would have a high score, and some smaller issues may not initially be worth pursuing. Through allocating resources to high-risk issues or higher ratings, companies can more efficiently solve challenges that have a significant impact on income, revenue, or their customers.
Today, business managers in all industries employ Pareto Analysis to assess which issues are causing the most serious trouble within their divisions, companies, or sectors.
Usually, a successful solution includes performing a statistical method, such as an analysis of cause and effect, to generate a list of possible problems and the effects of such problems.
The 80-20 approach can be applied according to the knowledge received from the study of cause and effect.