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Application of Pareto Analysis

Application of Pareto Analysis : Pareto analysis may be applicable in the presentation of Performance Indicators data through selection of representative process characteristics that truly determine or directly or indirectly influence or conform the desired quality or performance result or outcome. The Pareto Analysis is generally applicable to the following business situations :

(i) Pricing of a product :

• In the case of a firm dealing with multi-products, it would not be possible for it to analyze cost-profit- price volume relationships for all of them.
• In practice, in case of such firm approximately 20% of products may account for about 80% of total sales revenue. Pareto Analysis is used for analyzing the firm estimated sales revenues from various products and it might indicate that approximately 80% of its total sales revenue is earned from about 20% of its
products.
• Such analysis helps the top management to delegate the pricing decision for approximately 80% of its products to the lower levels of management, thus freeing themselves to concentrate on the pricing decisions for products approximately 20% which are essential for the company’s survival.
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(ii) Customer Profitability analysis:

• Instead of analysing products, customers can be analysed for their relative profitability to the organisation.
• Again it is often found that approximately 20% of customers generate 80% of the profit. There will always be some customers who are less profitable than others, just as some products are less profitable than others.
• Such an analysis is useful tool for evaluation of the portfolio of customer profile and decision making such as whether to continue serving a same customer group, what is the extent of promotion expenses to be incurred.

(iii) ABC analysis- Stock Control: 

Another application of Pareto analysis is in stock control where it may be found that only a few of the goods in stock make up most of the value. In practice approximately 20% of the total quantity of stock may account for about 80% of its value. The outcome of such analysis is that by concentrating on small proportion of stock items that jointly accounts for 80% of the total value, a firm may well be able to control most of monetary investment in stocks.

(iv) Application in Activity Based Costing: 

In Activity Based Costing it is often said that 20% of an organisation cost drivers are responsible for 80% of the total cost. By analysing, monitoring and controlling those cost drivers that cause most cost, a better control and understanding of overheads will be obtained.

(v) Quality Control :

• Pareto analysis seeks to discover from an analysis of defect report or customer complaints which “vital few” causes are responsible for most of the reported problems.
• Often, 80% of reported problems can usually be traced to 20% of the various underlying causes. By concentrating once efforts on rectifying the vital 20%, one can have the greatest immediate impact on product quality.
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