The Pareto's Principle for Business Management by 50Minutes.com

Author:50Minutes.com
Language: eng
Format: epub
Publisher: 50Minutes.com
Published: 2017-02-28T00:00:00+00:00

Practical application

In this chapter, we can apply what we have learned so far. We will start by creating a Pareto chart, which is useful to visually identify the most important 20%. The example is about a vendor and its customers and it is intentionally simplistic to make it easy to understand. A more comprehensive case study can be found at the end of this chapter.

Formatting the table

The first step is to prepare a table. As we want to find the most important 20%, it is advisable to sort the data in descending order to immediately detect the important elements.

In the first column, write a list of factors to observe (for example, a customer list). In the second column, there must be variables that correspond to the factors (for example, the amount of purchases made by individual customers).

Then we need to calculate the percentage of each object (in this case, each customer) and the cumulative percentage. This percentage will draw a line of cumulative percentages in Pareto’s chart. By adding all the data, the 80% threshold will emerge.

Good to know

It is not always easy to identify the customers because there are so many individuals in the retail sector. Companies can still develop ways to acquire a database of reliable customers; using a loyalty card is a prime example.

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