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Transcript of Pareto Principle
Claudio Di Poce
Jesse David Delfin
Sonja Jean Leverty
The Pareto Principle
Is a rule of thumb that states 80% of outcomes can be attributed to 20% of the causes for a given event. More generally, that most things in life are not distributed evenly.
The ’80-20’ rule can also be used in business, software, occupational health and safety, economics, management and many more areas.
An Italian economist and socialist, Vilfredo Pareto developed the Pareto Principle in 1906.
Pareto observed that 80% of the land in Italy was owned by 20% of the population.
Pareto's principle was proven when he noticed that 20% of his pea pods contained 80% of the peas.
Dr. Joseph Juran, a business management consultant further developed Pareto’s rule by applying it to business and other situations.
Juran indicated that 80% of problems came from 20% defects. At first he had a more of a 'glass is half empty outlook'.
Improving Business with the 80/20 rule
By utilizing the 80/20 rule, individual employees can prioritize their tasks so that they can focus on the critical 20% that will produce 80% of the results. The Pareto Principle teaches employees to not waste time on the trivial tasks that will not contribute to the long term goal and to focus their resources on the vital few tasks that will produce the majority of the results.
Regardless of the type of business, it is a common occurrence that roughly 20% of salesmen produce 80% of sales. Depending on the business' end goals, the Pareto Principle can be utilized to determine whether it needs to focus effort and resources on the 20% of staff that produce most of the sales to further improve their skills or to focus on the 80% of other employees that are struggling to bring in any sales.
The 80/20 rule suggests that a standard overview of a business’ website analytics will indicate that roughly 80% of traffic lands on 20% of the websites pages. The 20% of pages that attract the most views are generally the critical pages that display content in relation to the purchasing process of the product or service.
Identify and Fix Problems
A Pareto chart is highly useful for prioritizing problems so that you can determine which issues have the greatest effect on the outcome of a given situation. This not only allows the business to identify problems, but it also enables them to take appropriate actions to resolve the most important issues concerning the business.
Improve Customer Service
Customer support is a crucial aspect of any business so it is prudent to ensure that your customers are satisfied with the customer service they receive. The Pareto Principle indicates that 80% of customer complaints are related to 20% of your products/services, so a proper analysis of which products/services are causing problems for your business can help you to permanently sort out customer service issues.
Number 1 Misapplication: 80+20=100
Number 2 Misapplication: 80/20 Applied Recursively
The Top 3 Misapplications
of the 80/20 Rule
Many times businesses try to explain the 80/20 Rule by using a pie chart. A fifth of the chart is marked 20% and the rest is marked with 80%. While anyone with basic skills in mathematics can see how this adds up to 100% (Holtz, 2008), inputs and outputs are not the same thing, and therefore can not be made into the same pie chart. That they add up to 100 is strictly a coincidence.
Another confusion is often made in regard to the argument that if the business continues to use to 80/20 Rule, eliminating the wasteful 80%, they will eventually end up with nothing.
The actual applications of the rule are not as mathematical. The 80/20 Rule simply suggests that you should just look at the all of the tasks that you could perform normally. Focus on the 20% that generates the most positive results. Anytime that there is left over, spend it on the other 80% of activities that are less productive (Holtz, 2008).
80/20 to Perfection
The 80/20 Rule is often applied when building skills. It may take a couple of years to become 80% proficient, however, to get the last 20% of the skills; there needs to be an investment of eight more years. Skills advice often goes against the 80/20 Rule. Instead of eliminating the need for that last 20%, you invest most of time to master the last 20%.
The point of the 80/20 Rule is that it should downplay or minimize the inefficient 80% of inputs. There are times when this rule does not apply. Mastering a skill can be one of those areas where the 80/20 advice is faulty (Holtz, 2008).
What have you learned from this presentation?
In 1906 Valfredo Pareto developed the principal when he noticed that 20% of his pea pods contained 80% of the peas
from 20% of vendors.
80% of revenues will be the result of sales made by 20% of sales staff.
20% of workers will cause 80% of problems, or 20% of workers will deliver 80% of the entire production
The 80/20 rule states with any set of things, (workers, customers, etc.) about 20% are vital and 80% are considered trivial.
Applications in the real world
In a warehouse 20% of
hand occupies 80% of the warehouse space.
"80% of the effects come from 20% of the causes"("Pareto principle - Wikipedia",)
When reevaluating a scenario, it is important to focus on the 20%, without completely discarding the other 80%, otherwise the firm could end up with nothing
A Pareto chart can help to focus on the 20% of the cause to influence 80% of the outcome
Pinnacle Management Associates, LLC (2001). Pareto Principle -- How to Apply It, and What to Avoid. Retrieved 2013, from http://www.pinnicle.com/Articles/Pareto_Principle/pareto_principle.html
Investopedia (n.d.). Definition of '80-20' rule. Accessed on June 22, 2013, from http://www.investopedia.com/terms/1/80-20-rule.asp
Holtz, P. (2008). Upside: How to Profit in Down Economy. Lulu.com. Accessed on June 22, 2013, from http://books.google.com
Investopedia. (n.d.). Definition of '80-20' rule. Accessed on June 22, 2013, from http://www.investopedia.com/terms/1/80-20-rule.asp
Pareto Principle - The 80-20 Rule - Complete Information. Accessed on June 22, 2013, from http://www.gassner.co.il/pareto/
Zuhair, I (October 31, 2012) Top 5 Ways the Pareto Principle Can Improve Your Business. AcRetrieved from http://www.trackvia.com/blog/productivity/top-5-ways-the-pareto-principle-can-improve-your-business