Pareto Chart for PMP Exam Prep

Project managers need to look at various sources of data about the project they’re managing. This can get confusing when you’re flooded with multiple causes, issues, or defects.

There are seven basic quality tools, out of which, the Pareto Chart helps project managers. This visual tool highlights the vital problems that need to be addressed on priority. This tool combines a descending bar graph with a cumulative percentage line to zero in on the most crucial contributors.

In this blog, we will look at what the Pareto chart is, the principle behind it, its application and how to create one. 

What is The Pareto Chart and Pareto Principle? 

Did you know? The Pareto Principle is the 80-20 rule in Project Management Courses which postulates that 80% of the problems are caused by 20% of the root or source causes. 

The Pareto Principle  

Vilfredo Pareto, an economist, in 1896, when working at Lausanne University, found that 20% of the population in Italy held 80% of the land. The Management Expert M Juran later refined this finding into what is now called the 80-20 Principle or Pareto Principle. The Pareto principle postulates that 20% of the root causes are responsible for causing 80% of the problems. This is not an absolute ratio but is a general rule that proves very useful in Project Management. Let's now get to the Pareto chart. 

You can also implement a 5 whys root cause analysis process to find the main problem. 

What is a Pareto Chart About?

PMP programs define the Pareto chart as a histogram using which the discrete observations are divided into various categories and the "vital few" observations and elements that are used to find the solution with the maximum efficiency or impact. Hence the 80-20 principle-based Pareto Chart is, in reality, a tool used by PMPs for prioritization. Similarly, the PMP uses a risk assessment tool and the Probability Impact versus Probability Risk Matrix when assessing risks. Then the high-risk issues are dealt with on priority while the low-risk issues are monitored and put on a watch list. Thus, in management, addressing 20% of the root causes or risks on a priority basis can impact 80% of the issues and solutions. 

Check out the steps involved in risk management for improved project execution. 

Application of Pareto's Principle

The driving force behind the Pareto Principle is that a small portion of all causes lead to significant effects. It can be summarized into the 80-20 rule – 20% of problems cause 80% of defects. Pareto charts visualize this and help project managers understand what to focus their efforts on. 

The Pareto chart offers a focus list in decreasing order of priority. The most pressing issues are highlighted at the core. This clarity also helps the entire team to focus their efforts on solving prominent issues instead of those that don’t pose much risk. It is used to rank categories such as types of defects, common customer complaints, or reasons for project delays. This is done by mapping each of these categories versus cumulative percentage of problems. 

A good example of the Pareto chart can be shown in quality control. If 80% of hardware defects are from two components, project managers can prioritize testing for these components instead of focusing on fixing the entire system. 

This approach can be applied across various industries. Let's look at a few of them: 

• Manufacturing – Identifying major drivers of errors that occur during production. 
• Project Management – Pinpoint recurring risks and bottlenecks impacting project timelines 
• Customer Satisfaction – Zero in on most common and severe customer complaints 

Organizations can use Pareto analysis to strategically plan and eliminate problems. 

Components of a Pareto Chart 

A Pareto chart has two major components – a bar graph and a line graph. 

The bar graph makes up the x-axis of the Pareto chart and displays distinct categories or factors based on the scenario. These categories are arranged from left to right. The vertical bars represent each category’s measure, in terms of factors like cost, frequency, or time. These bars are sorted in descending order, to show the most significant contributors first. 

The chart is surrounded by a dual y-axis setup. The y-axis on the left is used to quantify values of each category. The y-axis on the right tracks the cumulative percentage of all categories. The cumulative percentage line rises along the graph and visually maps how much is accounted for. This often reaches 80% by the first few categories. 

Other elements of the chart include the following: 

• Baseline for reference of the values 
• A descriptive title 
• Legens or Annotations to clearly read the chart 

These elements are used to add context and easily understand the chart. These components come together to turn raw data into easily digestible information. 

How to Build/Draw a Pareto chart?

Let us start by studying the essential factors to draw the Pareto chart.  

Essentials of a Pareto Chart:

You can make a Pareto chart and diagram only if you can 

• Arrange your data into various categories 
• Rank the categories based on their importance 

Here is how the customer complaints Pareto diagram PMP chart of a garments store would look like: 

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How to Draw up The Pareto Chart

Here is how to draw up a Pareto chart that can be used over various situations. 

• First, decide the categories or data classifications you will use to obtain the Pareto bar graph. 
• Select an appropriate unit of measurement. For example, quantity, frequency, time, cost, etc. 
• Next, decide on the bar graph's time period. Is it weekly, monthly, quarterly, half-yearly, annually, etc.? 
• Group all data into categories and the same measurement units and time. Arrange the values in descending order. 
• Find out the total across all categories of the data.

Here is an example of the resulting table, often referred as a Pareto Table.

• Select the scale of the data assembly. The total of the measurements made in the previous step is the maximum value, i.e. 73 in our case. 
• Now construct the chart's bars while labelling each bar.  
• The longest bar is always to the left and the shortest to the extreme right. (Refer the pareto chart above) 

Pareto Charts in MS Excel

Making the Pareto chart for any data in Excel involves two steps.  

• Firstly, select the column data with the list of data categories and a column for the numbers. The chart will then group the same data into the list of categories while summing up the numbers corresponding to the data. 

• Now use a statistics chart under the insert tab of a histogram and select Pareto Chart under histograms as shown.  

Pareto Charts in Statistics: 

When it comes to drawing a statistics chart with the given data, here is how you can draw the Pareto chart. 

• Firstly, arrange the data set in its decreasing measurements of occurrences or frequency. 
• Next, the sum of measures is calculated. 
• Also, the line graph will need the percentage of occurrences and its cumulative category-wise percentage. 
• All items are listed on the horizontal X-axis ranging from the highest to the left and the lowest to the right. 
• Now suitably label the left Y-axis with the frequency numbers and the right Y-axis with the total cumulative percentages (equal to 100 always). 
• Draw up the category–wise bars. 
• Finally, draw the cumulative percentages line graph. 

Know more about the Pareto chart tools, how to use them for analysis diagrams, and the uses of Pareto charts in project management. 

Benefits of Pareto Charts 

Pareto charts have many benefits in project management and other industries. 

• Clarity in Prioritization: The major contributors for majority of the problems are quickly identified. This ensures that the most crucial problems are prioritized. 
• Visual Simplicity: By combining simple aspects of a bar graph and a line graph, Pareto charts are easy to interpret. It can be easily understood at a glance, even for non-technical stakeholders. 
• Efficient Resource Allocation: Managers can optimize resource allocation and focus on high-impact areas and reduce time spent on less significant issues. 
• Data-Driven Decisions: Decisions are made with concrete evidence, backed by data. Subjective bias and intuitive decisions are eliminated by using a Paret chart. 
• Improvement Tracking: By updating Pareto charts on a fixed time period helps in tracking improvements. This helps project managers to understand if their efforts are showing any results. 
• Effective Communication: Pareto charts can be used to align teams and persuade leadership on any changes to resource allocation. 
• Broad Applicability: The applications of Pareto charts across industries make it a crucial tool in project management. 

The Cons of the Pareto Chart 

While the Pareto chart has a lot of benefits, there are some drawbacks as well, which project managers need to keep in mind. 

• Oversimplification of Issues: Complex and multi-dimensional problems are reduced into a single ranking. This can lead to oversight of deeper root causes. 
• Assumption of 80/20 Rule: There could be situations that do not follow the 80/20 distribution. Blindly going ahead with this assumption can lead to misdirected priorities. 
• Focus on Frequency, Not Impact: In certain situations, rare but high-severity issues can be overshadowed by frequent minor problems. 
• Data Quality Dependence: Pareto charts rely on the sanctity of data used. Data which is inaccurate, incomplete, or poorly categorized, can lead to wrong conclusions from a distorted analysis. 
• Static Snapshot: If the Pareto chart isn’t updated regularly, evolving trends or emerging issues can’t be identified. 
• Limited Context: Root cause analysis is needed to complement the factors identified from a Pareto chart. The reason behind these biggest issues need to be identified and resolved. 
• Potential Misuse: Teams may misuse Pareto charts as a shortcut for decision-making without considering qualitative factors or organizational context. 

Pareto Analysis: 

When analysing an issue to draw its Pareto chart, it is essential to identify the root cause of the problem.  

Root Cause Determination:

Root causes are identified in a problem through methods like fishbone diagrams, brainstorming, or the 5 Whys approach.  

Here's briefly an example using the 5-Whys approach to a person coming to work late. 

Addressing the root cause resolves the problem through a lasting solution. Similarly, all complex problems can be broken down into smaller lists of causes and prioritized on the Pareto Principle.

Analysing the Pareto Chart

The Pareto Chart analysis has two methods to read the charts depending on what you need to know about. 

• Pareto Counts Method: In this method, you use a Pareto chart, diagram, and analysis to find the most frequently occurring category. For example, you have two problems that occur, say 25 times, while the other one occurs just five times. Using this method, you target the most frequent category that occurs 25 times rather than the one occurring five times.  
• Pareto Cost Method: In this method, you use the category having the most expensive specified cost factors for your analysis and can pinpoint the category's specific impact and details. Now, for example, in the above example, the problem occurring five times costs ₹150 each time to resolve, the total cost to the company is ₹750. If the problem occurs 25 times costs just ₹10, the total cost would be ₹250. Hence, you would prioritize the issue five times as it costs more by this method. 

Also check – Complete Project Management Tutorial 

Examples for Pareto Chart

Pareto charts are most useful when analyzing bulk data (For example, when analyzing the data of an industry's manufacturing line). The Pareto Chart lists the issues on the X-axis and the frequency of occurrence or the number of occurrences of each issue on the Y-Axis or the bar's height. The line graph atop the bar graph generally shows the occurrence percentage of each category. 

Some of its other uses are 

• Analyzing an organization's revenue growth over some time, say monthly, quarterly, half-yearly, annually, etc. 
• When explaining the data set and categories of the data to other people. 
• To narrow down the data set to a specific subset of data or category and work on the data subset. 
• While finding the most critical problems and helping resolve them through focusing on the major vital few issues. 
• Analyzing a country's or city's population growth on an annual basis. 
• Identifying and resolving major customer complaints on a priority basis. 

Summing Up

Pareto charts are a helpful tool for project managers across industries. Project managers can make decisions by identifying issues that need to prioritized, and focus on them. 

These easy to interpret visual tools guide teams to act where it matters most. By updating Pareto charts, project managers can understand the progress they’re making on these critical issues. 

Whether you're navigating project roadblocks or quality challenges in PMP scenarios, this tool shines a spotlight on the change-makers, helping your team do more with less and deliver results that count. 

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