In the 1800's an Italian by the name of Vilfredo Pareto came upon a finding that became known as the 80/20 ratio. As he, and later others researched this finding they found that it could be applied in a number of ways. They found that 80% of the world's resources were consumed by 20% of the world's population and inversely 80% of the world's population existed on 20% of the world's resources. The trends in business were similar - 80% of revenue is generated by 20% of your business, 80% of the cost is in 20% of your business process, 80% of the problems exist in 20% of your operations and inversely 80% of your improvement can be gleaned out of 20% of your business processes. Similar ratios can be applied to leadership and supervision with leaders spending 80% of their time dealing with 20% of their staff and so on.
While there has been much discussion on the actual numbers in the ratio what does seem to be clear is that "a" ratio close to those numbers does indeed seem to exist and in fact can be used to enhance a company or team's continuous improvement efforts. I am sure you are asking how this can be so let's look at a couple of real life examples of how different companies tackled some issues by applying Pareto’s ratio.
In one oil and gas service company there was concern with issues around non productive time and its impact upon overall operational effectiveness. The approach taken was to use a simple spread sheet to track time for all activities that happened every 24 hours on the lease. Over the course of several months they collected enough data to begin to see some interesting trends and they put that information into Pareto charts which listed key non productive activities in rank order in hours from biggest to smallest. Several items immediately jumped out from the data, maintenance times and winterizing.
Applying the Pareto ratio it was determined that if they could tackle those two issues and eliminate them it would greatly enhance their operational effectiveness and add value to their clients. Over the course of the next few months’ crews collaborated to come up with new and innovative approaches to deal with maintenance times and winterizing and by the end of the first year they had successfully moved those two items off the Pareto chart. And, as part of their continuous improvement approach, what they did next was tackle the next two biggest issues on the Pareto chart and so on.
In another company that exported LNG off the coast of the Gulf of Mexico they applied the Pareto ratio to applying a behavior based safety approach to solving issues. They collected safety data and created a Pareto chart listing issues from most numerous to least numerous. What their chart revealed was that the largest number of safety incidents were happening around operation of the plant golf carts that were used to get around the very large facility. Here again the crews and leadership collaborated in looking for ways to extinguish the behaviors they did not want and promote the safety behaviors they wanted. In a very short period of time they had moved this item completely off their Pareto list and had moved on to the next biggest item.
A Path To Continuous Improvement
Both are excellent examples of how two different groups took the Pareto ratio and used it to identify problems and enhance overall performance. It was an effective tool for identifying issues and measuring success in dealing with those issues. What’s more is that since no company can completely remove every item off their Pareto chart the opportunities for continuous improvement never really go away. Can you identify what the key issues are in your company that are inhibiting operational effectiveness? If not, then perhaps it is time to consider continuous improvement. Performance Leadership - Think About It!