04 December 2012

the pareto principle: the vital few and trivial many.

Hello! I've always known December to be cold and dark because I grew up in New York, but the Virginia weather is stunning today and I'm loving it!!

Today, I'd like to talk about the Pareto Principle. The Pareto Principle, also known as the 80/20 Rule, states that about 80% of effects come from 20% of causes. My simple explanation is that 80% of the trouble comes from 20% of the problems. To apply this principle during analysis, the Pareto Chart is used to determine the "vital few"causes that are responsible for the majority of defects. The Pareto Chart is a type of bar graph. Each bar displays the frequency of occurrences in a certain category and is organized from the greatest (left) to the least (right).

The Pareto Chart is one of the Seven Basic Quality Tools and I'm going to show you how I analyzed my expenses from November in R! If you'd like to follow along, download the current version of R: 2.15.2 "Trick or Treat." You'll also need to install the "qcc" package in order to create the chart.

1. I created a vector named "expenses" that contains the cost of each expense I paid in November.

> expenses <- c(495, 286, 81, 80, 73, 39, 40, 25)

2. Next, I categorized or named each expense with the names() function. Note: the names must be in the same order you listed for costs.

> names(expenses) <- c("rent", "car"," phone", "groceries", "insurance", "gas", "electric", "water")

Use the data.frame() function if you prefer to work with a data frame. I'll name mine "df.expenses"

> df.expenses <- data.frame(expenses)

Print the vector (expenses) and the data frame (df.expenses) to see how the data is displayed.

> expenses
  rent  car  iPhone  groceries  insurance   gas  electric  water 
   495  286      81         80         73    39        40     25 

> df.expenses          expensesrent           495car            286iPhone          81groceries       80insurance       73gas             39electric        40water           25

3. Now we use the library() function to load the "qcc" package and create the Pareto Chart.

> library(qcc)
Loading required package: MASS
Package 'qcc', version 2.2
Type 'citation("qcc")' for citing this R package in publications.

> pareto.chart(expenses)

Pareto chart analysis for expenses
              Frequency   Cum.Freq.  Percentage Cum.Percent.
  rent       495.000000  495.000000   44.235925    44.235925
  car        286.000000  781.000000   25.558534    69.794459
  iPhone      81.000000  862.000000    7.238606    77.033065
  groceries   80.000000  942.000000    7.149240    84.182306
  insurance   73.000000 1015.000000    6.523682    90.705987
  electric    40.000000 1055.000000    3.574620    94.280608
  gas         39.000000 1094.000000    3.485255    97.765862
  water       25.000000 1119.000000    2.234138   100.000000

(Above) By default, the pareto.chart() function shows a Pareto analysis and the corresponding chart. Let's add some labels and spice it up!

> pareto.chart(expenses,main="Pareto Chart for Andy's November Expenses",xlab="Name of Expense",ylab="Amount of Expense",las=1,col=topo.colors(8))

Here is a list of the arguments I used and what they mean:
- main: title for Pareto Chart
- xlab: x-axis label
- ylab: y-axis label
- las: orientation of labels on axes (1=horizontal, 2=vertical, 3= perpendicular to axes)
- col=type(length(expenses)): if you don't like the cool tones of topo.colors palette, replace the type with heat.colors for warm tones, terrain.colors for earthy tones, or rainbow for ROYGBIV colors

4. To make it easier for analysis, I added a horizontal line at 80% to see which expenses were problematic for in November.

> abline(h=(sum(expenses)*0.80),col="red",lwd=4)

R calls lines "A-B lines" so we use the abline() function. The h stands for horizontal. This horizontal line is equal to the sum of my expenses multiplied by 0.80. By default, the line width is set to 1 and the color is black but I used the col and lwd arguments for a red colored line and a thicker line width of 4.

5. There's my final product! The major contributors of November's expenses were rent and car! In other words, my rent and car account for the majority of my expenses (80% of problems). Also, I should focus my efforts on these two expenses for the greatest improvement -- note to self: find a place with cheaper rent and/or sell my car for a bicycle!

The Pareto Principle states that about 80% of effects come from 20% of causes. The chart illustrates the small number of causes that account for most of the problems. Remember, the Pareto Chart can only be used when your data are broken into categories with the corresponding frequency of occurrences.


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