PARETO ANALYSIS Meaning and
Definition
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Pareto analysis, also known as the 80/20 rule or the Pareto principle, is a statistical technique used to identify and prioritize the most significant factors or problems that contribute to a desired outcome. The concept was introduced by Italian economist Vilfredo Pareto, who observed that approximately 80% of the effects or results often arise from around 20% of the causes or inputs.
In business and management, Pareto analysis involves breaking down a complex set of data into smaller categories or segments, typically based on the principle of "vital few and trivial many." This technique is especially helpful in identifying areas where the majority of problems or successes are concentrated, enabling organizations to focus their resources, efforts, and strategies on gaining the maximum benefit or improvement.
To conduct Pareto analysis, data is usually presented in the form of a bar chart, with the individual categories or factors plotted in descending order of their significance. The cumulative total of these categories is also calculated to help determine the extent to which the top few categories contribute to the overall effect. By focusing on the few most important categories, organizations can make effective decisions, allocate resources efficiently, and generate significant positive outcomes.
Pareto analysis is applied in various fields, such as quality control, project management, cost optimization, marketing, and risk assessment. It provides a powerful tool for identifying and addressing the key areas that would produce the greatest impact or yield the highest return on investment.
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Etymology of PARETO ANALYSIS
The word "Pareto analysis" derives its name from the Italian economist Vilfredo Pareto. Vilfredo Pareto developed the concept of Pareto efficiency and Pareto principle. The analysis technique known as "Pareto analysis" is based on this principle, which states that a large portion of the effects in any system are brought about by a small portion of the causes. Hence, the term "Pareto analysis" refers to the method of analyzing and prioritizing factors based on the principle established by Vilfredo Pareto.
