Vilfredo Pareto and the 80-20 Rule in Lean

July 3, 2017

In 1848, there was born a gentleman by the name of Vilfredo Federico Damaso Pareto in Italy. He was an industrialist, sociologist, economist, and philosopher. Pareto made some important contributions to modern economics, particularly in the study of income distribution and the analysis of individuals' choices.

He introduced the concept of Pareto efficiency and helped develop the field of microeconomics that many of you may have studied in college. He was the first to discover that income follows a Pareto distribution in the fields of sociology and mathematics. What’s important about Pareto, for those of us interested in operational excellence and lean, is the important aspects he developed that any organization of any size can benefit from understanding and leveraging. If my memory serves me correctly, it was Dr. Joe Juran (who helped the Japanese after World War II develop modern quality techniques) who made the leap of transforming this principle to one that serious students of lean and Six Sigma recognize today as Pareto's Law or the Pareto Principle.

For example, one of the resulting economic rules that came from Pareto was the Pareto Chart, a special type of histogram, a way to chart data. This is used to view causes of a problem in order of severity from largest to smallest. This tool graphically demonstrates the Pareto principle or the 80-20 rule, that is a central tool in Lean Six Sigma and the Toyota production system.

This tool is integral to the seven scientific management tool approaches codified by the Japan Union of Scientists and Engineers (JUSE) after World War II. They were influenced in part by Drs. Deming and Juran who, in turn, were students of Pareto and other fathers of modern quality. I’m sharing this little history lesson as yet another example of how modern best practices in operational excellence, in fact, have their foundations in the 19th century.

Getting to the point

To make this really simple, let’s just get to the point we care about: 80% of the issues we encounter typically result from 20% of the causes most of the time. Consider these basic questions and statements: if you manage employees, what percentage of the people you manage give you the majority of your headaches? Most organizations probably attribute 80% of their profits to just 20% of their customers. The old axiom you may have heard suggests that 80% of your results are attributable to what percentage of your efforts? You guessed it... 20%.

In the practice of basic Kaizen, I have woven into the fabric of the learning experience an aspect of Pareto’s Law (aka the 80/20 rule) to help teams figure out where to focus. After teaching my audience the necessary skills to differentiate between what adds value and what doesn’t, we then go into a brainstorming session to generate some information to work with in applying this basic rule.

First, we narrow our focus to the part of the organization where we spend a lot of money and have issues–typically a given process, department or functional area. We then make a list of the things that go wrong–issues generating wasted resources, time, materials, scrap, rework, mistakes and other manifestations of waste and variation in the process.

We then will bring a little science into play, by then having the team estimate (or gather data to support) an agreed-upon frequency and impact of each of the issues named. When they finish, I then have the team identify which things from the list to focus on for the balance of the Kaizen effort, based on the 80/20 rule. I have done this exercise with thousands of people in hundreds of organizations around the world, and I almost always see this rule working well in finding our big hitters based on a top-down listing of the issues in descending order of impact. In the majority of cases, at least 80% of their opportunity for improvement shows up in the first 20% of listed issues.

Real-life examples

Recently, I facilitated a large team of government employees to look closely at the costs for medications for prisoners. We did value stream mapping of the process from the time that a prisoner requests a doctor’s visit to the time we put the medicine in their mouths. We mapped out about 45 process steps required for the effort involving nine different functional groups.

For each step, we detailed how much time was spent doing the work and entered it in a spreadsheet. We learned that we are currently spending about 1.5 hours of labor resources for prison medical staff for each new prescription given. This is where the 80/20 rule comes in.
Of the 45 steps, how many do you suppose make up 80% of the labor time?

Doing the math suggests 20% of 45 steps would equate to about nine steps that should account for 80% of the time and money in the process. In fact, for this example, 81% of the total process cost from a labor perspective was where we ended up after identifying the nine steps with the most labor content.

Let me warn you that this elegant math does not always hold up at exactly the ratios of 80/20. For example, we then did a study on two respective prisons to examine which medicines made up most of the spending, expecting a similar result. What we learned was interesting. For the first prison, 34 of 351 medicines was just 9.7% of the list, but made up 80% of the spend. For the other prison, there were 419 medicines listed and just 29, or 6.9 %, making up 80% of the spend.

Here is something important about this discussion: We want to use the Pareto Principle to isolate the things that are 80% of our problem. We should not be hung up on whether or not they add up to a neat 20% of the causes. What we are looking for is where to spend our time in analysis first to find alternative treatments and lower-cost medicines. Which do we want to focus on first? In the case of medicines in prisons, less than 10% of the medicines prescribed offer us 80% of our opportunities. It’s a whole lot easier to have a team focus on just 34 medicines for improvements versus looking at 351 of them.

The fact that the numbers did not fit in a neat little expected value of 20% of meds equaling 80% of our spend is not important. Knowing which ones do make up 80% of the spend is the key.
We can then focus our scarce time, money and resources on improvement where it will do the most good.

Don’t boil the ocean when solving problems. Start with sampling getting clear on which ones should go first―using Pareto’s Law to guide our thinking.

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