Pareto Chart for PMP Exam Prep

The trained PMP or Project Management Professionals are required to resolve project and management issues. However, projects have constraints in terms of money, resources, and time. The PMP is the person who investigates issues in project management and finds the best solutions to frequent problems and significant issues using minimal resources. Towards this end, the Pareto chart is among the seven most-used quality tools in management that deal with efficiency.  

When preparing for the PMP exam, look for the best PMP Prep course as they always cover questions related to PMP best practices, tools, and techniques. The other six tools are the 'Ishikawa' or cause-and-effect diagram, the histogram, the check sheet, the flowchart, the scatter diagram, and the control chart. 

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

So, how does the Pareto Chart work? The Pareto chart in PMP's daily chores highlights the most important factors that usually cause the most frequent reasons for the problems, frequent defects, and customer complaints. It could be a line graph representing the defect percentage cumulative or a bar chart with the bar width being the defect frequency. The bar chart normally has the bar heights descending from left to right or highest to the lowest bar. Thus, the Pareto Chart separates the root causes and the problems while prioritizing in decreasing order the opportunities in mutually exclusive categories. The high-priority issues are solved first, and the low priority causes are monitored closely. 

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: 

Pareto Charts in Project Management

Pareto charts are used for task prioritization of various factors in project management. Namely, 

• Physical, financial resources allocation, and team prioritization. 
• Voting prioritization of product requirements. 
• User stories and product backlog item prioritization. 
• Project funding prioritization. 
• Risk prioritization of any individual project. 
• Multi-stakeholder project prioritization of the stakeholders. 

Providing a rank or focusing on the most important issues includes  

• Continuous adjustments, reviews of the watch-list, and the re-prioritizing of work. 
• Using and finding the best method of prioritization for the particular project. 
• Identifying and ranking the critical and high-level priorities when strategizing. 

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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

Here are the main reasons for using Pareto charts and their analysis. 

• It is easy to draw and analyse a Pareto chart. 
• The chart separates the causes and the problems. 
• The Pareto Principle focuses on resolving the issues that generate the most problems. 
• It helps you rank the problems by their importance to producing the most improved solution. 
• Pareto charts can be used as a visual communication tool to visualize the problems and their causes.

The Cons of the Pareto Chart

The limitations are few and are stated below. 

• The Pareto rule is a general guiding principle that may not apply to all cases. 
• The chart indicates the problem's frequency and not its severity. 
• The Pareto chart does not identify the root cause and needs a root cause analysis. 
• Past data is used and may not be significant for future or current issues analysis. 
• In multiple and sub-Pareto charts, segregation is cumbersome.

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. 

Use Pareto Charts to Get the 80% Advantage

Using Pareto Charts helps you prioritize and rank issues based on the occurrence frequencies. Once you know the order in which you should resolve them, you have applied Pareto's 80-20 rule, or a Pareto Chart helps determine the issues needing your immediate attention and resources to resolve. To learn more about Pareto charts and their impact on project management, try out the Knowledgehut best PMP Course today.  

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