Pareto Analysis

What’s it all about?

A technique for identifying the most important clients/products/issues in your business so that you can focus on the most significant things first.

I like this topic, it’s easy, relevant to most businesses and I have a seminar question which allows me to use an outrageous pun.

Watch this.

(Remember, videos like these that are produced to cover whole topics may include material that isn’t relevant to your own exam at your institution.)

Easy first video as no maths!

Does repeat the 80:20 ratio (which isn’t universal)

This video gives a good explanation and uses a more visual way of demonstrating the ‘vital few’ (the ones we need to care about). A good visual demonstration, but not so practical as the method I’ve shown above. Also, the lecturer is looking for the 80/20 relationship and finds it. We know that in reality it isn’t going to be exactly 80/20 though don’t we? That 80/20 is just a rule of thumb,

Demonstration of construction of a Pareto Chart in Excel.

You of course need to be able to do it on a piece of paper for an exam. And again, a focus on 80:20 which doesn’t always apply.

Another demonstration:

Doing Pareto Analysis to identify our biggest problems (rather than our best options).

Practice Questions

(These aren’t mine, but should be useful for you. Do remember that different teachers may use different techniques and different terms).

Further Reading.

The 80:20 rule has been taken up by the self-help movement as it is a sensible way of focusing on the most important things.

Using Pareto Analysis in your business.

Discussion of using Pareto Analysis to help a company develop. It uses the usal 80:20 ‘rule’ as if it an actual rule rather than a common occurrence. But it is still interesting on how the process can be used.

http://www.accountingweb.com/practice/clients/how-to-steer-clients-toward-profitable-growth

Wealth ownership

Pareto’s initial work was on income/capital ownership inequality. Something that is largely worse now as alluded to in this cartoon by Dave Brown in The Independent 20/1/15.

Cameron reworked

That’s how he ‘cartoons’ David Cameron.

Pareto first came up with the 80/20 “rule” looking at ownership of wealth in Italy.

If he did it now on global wealth it would be the 1/50 rule.

http://www.independent.co.uk/news/world/politics/world-richest-one-per-cent-global-wealth-half-study-credit-suisse-global-wealth-report-2017-a8054006

Using the Pareto Principle (80/20) rule in your personal and business life.

http://ow.ly/ZqPmg

Who is causing the problem?

A ratio of 50:10 here. With members of the richest 1% generating 175 x as much as the bottom 10%.

http://www.independent.co.uk/environment/climate-change/cop21-richest-10-per-cent-produce-half-the-world-s-co2-emissions-a6756511.html

What’s the ratio for the world?

Vilfredo Pareto’s initial work on wealth disparity in Italy gave us the 80:20 ‘rule’. 80% of the wealth held by 20% of the people.

Now it is 50% held by 0.000000008% of the people (a bus load!).

http://www.theguardian.com/business/2016/jan/18/richest-62-billionaires-wealthy-half-world-population-combined?CMP=fb_gu

Pareto Analysis The Simpsons Voice Actors

Possible Written Questions.

(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.

Discuss how and why an organisation might use Pareto analysis in decision making.

Explain the circumstances in which it would be useful to conduct Pareto Analysis on management accounting information you have for your organisation.

What is the significant difference in the interpretation of Pareto Analysis data when you are using Pareto Analysis to analyse problems (e.g complaints, failures in a system, rejects etc.) rather than benefits (e.g. sales).