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Friday, August 8, 2008

Pareto Chart Example

I will give you a very simple Pareto chart example. Create a new workbook and enter exactly the same figures in the screen shot below:





















The worksheet above is an example of list of reasons why you lost business proposals or quotes to other competitors. Column A has the reason descriptions. Column B has the corresponding number of times with that lost reasons in Column A. Column C has the percentages. Column D is the running percentages of Column C.

Highlight the range A1 to A6. Press Ctrl key simultaneously on highlighting the C1 to D6. Then click the Insert>Chart in the menu. The chart wizard will appear on the screen for you to choose the kind of chart that you want to create. Choose the Bar Chart. Click the finish button to display the chart equivalent of the table you selected. Right-click once one of the Running % bar and choose Chart Type in the menu that appears. The Chart Type window will pop out and then you can change Running % from bar to line type. The chart should look like the screen shot below:






















Now you know how to create your own Pareto chart, but you probably have questions at the back of your head right now. And you might be asking the following questions:

  1. I can't see the 80% and 20% in the chart so why is it called 80-20 rule based?
  2. How this chart can help the business?
  3. How this chart can be applied with a database with large repository of data?
I will try to answer these questions the best that I can.

1. ) I can't see the 80% and 20% in the chart so why is it called 80-20 rule based?

Answer: I intentionally made the sample Pareto chart an imperfect one to make it looks like a realistic one. The 80-20 rule doesn't mean that exactly 20% of the reasons are 80% of the root causes of losing businesses. It simply states the principle that a few of the reasons causes the majority of why you are losing, not exactly 20%. That's why the phrase "the vital few and the trivial many" was coined after this rule.

2.) How this chart can help the business?

Answer: Considering the example above, you can easily see that most of the reasons in losing a business are Price and Customers' Lack of Fund. The two reasons when combine together have more than 50% and simply means they are major root causes of your loses. Knowing that information, you can focus in those problem areas; you can act and fix on those situations. Once the problems are solved in those areas, you also solved more than 50% of the root causes and surely will improve your business performance and profitability. Then you can generate again another Pareto chart to know if the situation has changed and then focus again in the majority root causes. It is a continuous cycle of knowing the big problems and solving them.

3. How this chart can be applied with a database with large repository of data?

Answer: This is the most important part of our discussion. In your company, you surely have a lot of records sitting in your Excel files, Access files, SQL Server, Oracle, etc. How can we use them to create a Pareto chart.

Our example above is very simple that you don't need to convert it to Pareto chart to know what are the majority of the problems. But imagine, for example, if you have many branches, let's say 30 branches with 10 sales persons each that have multiple prospective customers and they are recording those leads pipeline in Excel to monitor quote status, amount, products, etc. Do you think you can easily come up with a Pareto chart with many Excel files in different locations? No, it's not that easy to consolidate those data. You need to have a procedure in implementing the consolidation and a good Excel macro program to automate the stitching of the records.

Another good example is: you are in a manufacturing company and having an ERP system. You want to create a Pareto chart because you want to know from which of the 60,000 raw materials that take most of your inventory investments. It is because you want to focus on them to make sure that majority of your investment is taken care of by keeping an eye on the correct reorder point, correct stock handling, good supplier selection, proper purchasing approval, etc. And with it, you can delegate the "trivial many" to your subordinates.

In my subsequent posts, I will demonstrate to you a different methods of how to export to excel records from different platforms (mostly with VBA programming); flat file, Excel, Access, SQL Server (OLAP or not) and Oracle. It will be a series of posts as I can not tackle them all in a sigle posting.

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6 comments:

lotto said...

Its ok if the appearance of your blog is not good. The important thing is the topic or the content of your blog.

Michael Swart said...

I just discovered this post after describing my own method of creating a pareto chart.

Cheers

Joel T. Protusada said...

I visited your blog Michael. Thanks for mentioning this post. :)

Hi lotto, thanks. I try to make my layout better in the future. :)

Sandi Mays said...

Hi Joel,

I saw your comment this morning on www.businesstoolsblog.com and added you to my Excel Blogroll.

Good luck with your blog!

Sandi

Joel T. Protusada said...

Hi Sandi, thanks a million... :)

Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!