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Sunday, August 3, 2008

Pareto Chart

The Pareto Chart, also known as the Pareto Analysis, ABC Analysis, or 80-20 Analysis, is based on the principle of "the vital few and trivial many" developed by Vilfredo Pareto, an Italian economist born in 1848. I'm not going to discuss here his life; you can already research on that in Wikipedia or Google. What you will read here is about the importance of his statistical findings, the 80-20 rule, that you can apply in almost every aspect of your life, especially in business. And in business, I will give you an example in my next post on how can you make the Pareto chart as a decision support tool by digging and using the data that you already have in your existing database. Yes, the raw data residing in your database, whether it's an Excel data, MS Access data, OLAP data, SAP data, or Oracle data, are just sitting there waiting to be dug up and be transformed to an information that will greatly help you to improve your business focus, operation, and eventually profitability.

The 80-20 rule means that approximately 20% of everything is either better or worse than the 80%. For example, 20% of your retail products are making 80% of your profitability. 20% of your sales agents are giving the 80% of the total sales. And here's a more enlightening; in an equally managed inventory of raw materials, 80% of your inventory investment goes to a certain small group of products that need more attention than the 20% that you can delegate to someone else. There are actually limitless applications to this theory. All you have to do is think outside the box and hard.

In the next post, the example I promised you will be discussed and in the subsequent posts thereafter, the different way to extract data from different sources (Flat file, Access, SQL Server, SAP and Oracle E-Business Suite) will be discussed. So be in the loop. Subscribe now. You'll see below how.

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Michael J. Swart said...

Cool article.

Here are some instructions on how to create a pareto chart in Excel. It's actually pretty easy.

Can't wait to see your example.