Pareto chart is widely used in Statistical Analysis for decision-making. It represents the Pareto principle, also called the 80/20 Rule.
Pareto principle, also called the 80/20 Rule means that 80% of the results are due to 20% of the causes. For example, 80% of the defects can be attributed to the key 20% of the causes. It is also termed as vital few and trivial many.
Vilfredo Pareto conducted surveys and observed that 80% of income in most of the countries went to 20% of the population.
The Pareto principle or the 80/20 Rule can be applied to various scenarios −
A Pareto chart is a combination of a Column chart and a Line chart. The Pareto chart shows the Columns in descending order of the Frequencies and the Line depicts the cumulative totals of Categories.
A Pareto chart will be as shown below −
You can use a Pareto chart for the following −
Consider the following data, where the defect causes and the respective counts are given.
Step 1 − Sort the table by the column - Defect Count in descending order (Largest to Smallest).
Step 2 − Create a column Cumulative Count as given below −
This would result in the following table −
Step 3 − Sum the column Defect Count.
Step 4 − Create a column Cumulative % as given below.
Step 5 − Format the column Cumulative % as Percentage.
You will use this table to create a Pareto chart.
By creating a Pareto chart, you can conclude what are the key causes for the defects. In Excel, you can create a Pareto chart as a combo chart of Column chart and Line chart.
Following are the steps to create Pareto chart −
Step 1 − Select the columns Defect Causes and Defect Count in the table.
Step 2 − Insert a Clustered Column chart.
Step 3 − As you can see, the columns representing causes are in descending order. Format the chart as follows.
Your chart will be as shown below.
Step 4 − Design the chart as follows.
The Edit Series dialog box appears.
Step 5 − Click on the cell – Cumulative % for Series name.
Step 6 − Select the data in Cumulative % column for Series values. Click OK.
Step 7 − Click OK in the Select Data Source dialog box. Your chart will be as shown below.
Step 8 − Click the DESIGN tab on the Ribbon.
Step 9 − Click Change Chart Type in the Type group.
Step 10 − Change Chart Type dialog box appears.
As you can observe, 80% of the defects are due to two causes.