Very often in life, we tend to forget that most of our problems in life are based on a few primary issues. The case is very much similar when it comes to businesses, provided the 80/20 rule. This idea is generated by Pareto analysis which says that 80% of our problems are generated by 20% of the causes. This 80/20 rule can be seen from various angles. 20% of our products usually generate 80% of the revenue, 80% of complaints from the customers are caused by 20% of our products or services, 20% bugs in our system cause 80% delays in work delivery and on and on. The idea to be understood here is the concept of vital few and trivial many. Once a business understands that even though they have done good amount of portfolio management and try to keep every product and employee intact, but still it is just a few key aspects that are the causes for most of the problems. As hard a reality as it may seem, there is a lot of imbalance in the modern world. However, now that we know that problem and understand it both statistically and in simple words, the solution is not very hard to find.
All the business needs to do is put extra focus and energy, by which we mean labor and finance in those key aspects that are causing the problem, while making sure that the standard of the key products that produce most of the revenue is not harmed. The right thing for the manager to do, is to focus more on the vital few, but that does not mean they should ignore the trivial many. Sometimes, the mere existence of the trivial many can be a supporting pillar for the businesses.
Once it has been understood how the Pareto analysis works and what it is trying to convey, the next step is to design the Pareto analysis for your respective business.
First off, you have to keep in mind the structure of a vertical bar chart. On the x-axis comes the cause of complaints, products, or anything for which you are doing the analysis. On the y-axis comes the count for those complaints or the accumulated generated revenue. Calculate the total count for each cause from descending order first and build a percentage table that totals all the sales or complains on one side. If you simple draw a line on 80% of the problems and let it touch the line and bring it down, you will notice that the part in the left are the vital few, the 20% of the causes, and they alone are causing the count to reach to 80%. Of course, this analysis is not meant to suit every situation, but in majority cases, be it our day to day life, or business operations we may encounter this kind of situation. Solution is simple to diversify and efficiently allocate resources according to it.