Let us assign times, investments and probabilities to each of the defects,and

then calculate the P. I. The results are shown in Table 3.

TABLE 3 (1) (2) (3) (4) Annual
Time to Invest- Probability Defect Value($) Recover ment($)
of Success P.I.
Years C 300,000 5.8 150,000 .65
26 E 250,000 2.0 50,000 .80 200 G
130,000 3.5 80,000 .60 28 B 45,000 1.0
10,000 .85 383 D 45,000 1.5 15,000 .50
100 A 35,000 0.8 5,000 .70 613 H
20,000 2.5 8,000 .95 95 F 20,000 1.5
10,000 .70 93 J 10,000 2.0 4,000 .40
50 I 10,000 1.0 6,000 .80 133
(1) x (4) P.I. = --------- x 100
(2) x (3) It now appears that defect A, B and E should receive priority. What
happened to defect C, our plum we were so eager to pluck? During the five years
that the project team is working on defect C, losses have accumulated to $1.5
million. With a probability of success of only 0.65, the potential recoverable
losses are $195,000 a year, but this would not begin to be realized until the end
of five years. Since it cost us $150,000 to solve the problem, substantial savings
won't show up until the seventh year. Is it worth waiting that long? Probably
not, when you consider the rapid changes in policy, personnel and technology that
take place today. A better solution might be to invest enough money in problem
solving to reduce the time it would take to increase the probability of success.
You might even experiment with the Priority Index formula and come up with a
different combination of parameters and weighting scheme; I would encourage you to
try it. We have taken a new look at our old friend, the Pareto principle, and
have examined its application to cost reduction and problem solving from a
different perspective. We have added new dimensions of time, investment dollars and
probability of success because these parameters are compatable with modern
management's approach to decision making. A Priority Index for combining these
dimensions seems to have promise as an effective, realistic management tool for
today and tomorrow. THE PARETO TECHNIQUE As can be seen from the preceding
discussion, the Pareto analysis has application for identifying which of several
problem areas deserve the greatest attention. It provides hard data on which
problems occur with greatest frequency rather than the usual reliance on personal
opinion based on undocumented observation. The technique is relatively simple to
apply. We have pointed out that the normal curve has its greatest frequency of
occurrence of an event near the center of the distribution. This is true because a
frequency distribution is a classification of a group of items by some quantitative
characteristic. he Pareto distribution, on the other hand, is arranged in the order
of the measurement value of the elements. In other words, for the Pareto
distribution we rank a series of events or problems in the order of the numeric
value assigned to those events. We might use the tabulated occurrence of the
problem or the dollar value associated with the problem or any other quantitative
measure which might represent the reason for wanting to identify and solve the
problem. Data can be presented in tabular form as was done in the preceding
examples presented in the article by Hy Pitt. Another method of presentation which
provides a visual means of interpretation might be the histogram or more commonly
called the bar graph. In order to utilize the Pareto approach to problem
solving we must first identify a series of problem areas. Each problem must be one
which we can quantify in the same units (dollar losses for example). We will
discuss a method of identifying these problem areas in the next section. Let's
look at an example of the method of isolating the serious problem utilizing the
Pareto analysis. This example is adapted from the publication, Q C Circles:
Application, Tools and Theory. The basic phases of the Pareto Technique are as
follows: 1. List all the problem areas associated with the situation. Include all
elements at this stage so as not to rule out any area at too early a stage. 2.
Measure the elements using the same measure for each. Usually this will be in terms
of dollars, time, frequency, etc. At this point no order is given to the elements
or to the measurements. 3. Arrange the elements according to their measurement,
chart the results and graph the elements and their measurements. From the chart and
graph it is possible to: a) assign priorities to the various elements b)
gain an understanding of the elements c) provide a better description of the
elements d) generate standard information for any analysis which follows
e) select a goal using the Pareto chart as supporting documentation. If the
Pareto distribution is ordered by dollar value it becomes possibleto identify areas
which will yield the greatest cost benefit in attacking theproblems.4. Construct a
cumulative distribution for the prioritized items andmeasurements. These cumulative
distributions when charted and graphed to forma Pareto curve will permit us to see
that a few items account for adisproportionate amount of all measurements.5. Study
and interpret the results. A good place to begin improvementis to work on those
elements whose measurements are the greatest. The decisionmust be made as to what
measurements to use in the analysis as was shown in thePitt article.
PARETO EXERCISE The following scrap data was collected by part number and
operation. PART OPERATION NUMBER
NUMBER A 40 D
70 C 50 C
70 D 20 B 70
E 20 D 50 C
70 A 40
D 20 B 70
E 50 B 70 C
20 E 70 D 40
D 70 E 70 B
70 1. Construct a Pareto chart by part number. 2. Construct a Pareto
distribution by part number. 3. Construct a Pareto chart by operation number.
4. Construct a Pareto distribution by operation number. 5. What conclusions may
be drawn from this analysis?