Pareto Charts Example & Discussion [Economics] [Manufacturing]


What do I do?

Well this article will cover how to break down a process, segment costs and make more meaningful decisions that hopefully lead to a greater focus on value add activities.

Firstly, in my series of three articles discussing manufacturing efficiency, we covered:

1. Why inefficient systems exist in the first place
2. What kinds of inefficiencies exist
3. How private companies minimize productive efficiencies (one of the inefficiencies I discuss in article two)

Those articles are important because they introduce the concepts of PFMEAs and control plans. I will discuss Pareto charting & 8D decision making at the beginning of this article. I will first discuss how efficiency tools (Pareto charts, PFMEAs, control plans, 8D decision making) that can help organizations make smarter decisions. I will then go into a discussion on government why I think corruption has managed its way into our public sector.

Pareto Charts & 8D Decision making

In this article, we will discuss two main issues and they are:
1. How companies target cost savings or Pareto charting
2. How companies avoid making the same mistake twice or the 8D decision making model

Pareto charting
What is Pareto charting and how does it help contain costs? These are the answers I hope to answer below. Before getting to that answer I will recount a brief history of the term Pareto and how it came to be used in manufacturing. Being Pareto efficient means utilizing all inputs optimally into reaching a desired outcome – in other words, since inputs are measured in dollar terms, if you can create the same desired output while lowering costs you’ve made a Pareto improvement. Once these improvements are no longer possible, your process is Pareto efficient – this should be the goal of every process. For the econ majors out there, this is when production is on the PPF as opposed to inside of it. Pareto charts also typically have high cost items charted first with lower cost items to follow in order of cost. Since they have costs illustrated in this manner, they become a really good quick summary for viewing costs from a process.

From my own experience, what Pareto charting allows for companies to do is look at a process and break down overall costs into segments. Then companies focus on lowering high dollar cost items in order of magnitude. This not only allows for continuous improvement & innovation but it allows for companies to solve more problems tomorrow than they were solving not today. Btw obviously companies will try their best to lower the high dollar value items but sometimes costs are fixed so companies try to lower those costs that are in their direct control (e.g. scrap or unnecessary inspection).

In a manufacturing setting, once the costs are segmented, process engineers will typically work to decrease the high item costs first. Instead of looking at manufacturing, I’ll utilize the taxi cab industry as a brief example. I’ve drawn a brief Pareto chart highlighting the costs over a typical week. Btw these costs are made up because I don’t have any inside information on taxi cab companies but I wanted to highlight the differences between how uber delivers the service and how the service has traditionally been delivered. In the chart, the red line represents how much the additional segment adds to costs. For example the car costs make up 40% of the total business cost so that’s why when the car cost is included the red line jumps from 60% –> 100%. A taxi company might look at the following chart and realize that something like gas, which makes up ~8% of total costs could be eliminated by either buying a more fuel efficient vehicle or maybe even invest in electric vehicles. The chart is detailed in the image below:

Screen Shot 2016-07-15 at 12.02.03 PM


Per week Business breakdown
Work for 4 days 500
Rent out for 3 days 100
Total for week 2300
Insurance $100
Gas $150
Dispatcher $280
License $500
Car $700
Total for week 1730
Some assumptions for the costs
Dispatcher 24 (hours) * 20 ($/hour) * 7 (days) / 12 cabs
License $100k cost amortized over 4 years
Car cost Includes 30k for car and 5k for repairs amortized over 4 years
Insurance $5000 annual cost

8D decision making
What is it and how do they help manufacturing?

First, a little historical background. 8D decision making was established by the Ford Motor Company to deal with repeated quality problems and trying to identify a root cause for failure modes they observed. If you think about it, if you keep making a part poorly there has to be a root cause from how it was manufactured. Until you fix this root cause that part will continue to be made poorly. Utilizing the PFMEA, a root cause can be identified & if your PFMEA doesn’t have this failure mode in it, that means that your PFMEA is not complete. 8D reports are essentially a database of failure modes with the respective root causes tied to it. If 8D reports are successful, then each failure mode should only have one 8D report since the root cause should have been successfully identified in a previous report.

There’s a lot of extra steps associated with 8D reports, however I’ve identified their main purpose. Other steps talk to ensuring the right team is working on the problem and containment actions are issued. Containment actions means that if a problem is discovered, make sure you know the parts affected, how they’re affected, how you’re containing the problem so more parts aren’t affected, basically actions that contain the problem parts. Identifying the root cause is the main value add from 8D reports and the step when identifying the root cause is the step that engineering teams spend the most time on.

It’s important to note that the majority of time spent writing the 8D report is spent trying to identify the correct root cause. Engineers use other tools (e.g. Fishbone diagrams) to fine tune and ensure the correct root cause has been properly identified. Fishbone diagrams attempt to break down the root cause into the components that affect part quality (e.g. People, Process, Machine) to identify prospective variations from what is expected when manufacturing a normal part. Engineers also utilize a 5 why methodology to drive down to why a certain failure mode occurred. Failure modes are always easy to identify after it’s apparent, however during an exercise, this insistence on continuously asking ‘why’ is a valued skill. The tools mentioned in this paragraph are especially useful, when the root cause is not apparent and since not all parameters are known (when manufacturing a product) these can be worthwhile exercises.

Corporations in disguise

First, a little discussion on how governments are actually just private corporations in disguise. No politician ever refers to them as corporations and that’s why I refer to them as “in disguise”. Since they are corporations, it is possible to change them, and it’s likely that governments do not refer to them as corporations for the simple reason that it reaffirms the belief that change is difficult to achieve. Governments all over the world promise the sun, star and the moon but at the end of the day, fall short on many of their promises. They fall short because they don’t have their resources realized and because their processes are not fully documented – really two in the same. Government has potential to do great things but currently that potential lays dormant and will continue to lay dormant until processes are standardized, knowledge capital is freed up, and focused efforts are led to solve problems.

For this reason, I always like to sprinkle in how the private industry concepts I discuss are directly applicable to government (public sector); this is because all process improvement methods I discuss are all relatively new. Many were developed in the 60’s by Japanese automotive manufacturing and since they are new they have yet to diffuse into the public sector. Currently, even American automotive manufacturers are implementing these new initiatives because they create value for their shareholders, they are not just meaningless exercises only applicable to manufacturing cars. These are the future of process and continuous improvements and that is why I’m so confident to shout it from the rooftops. I want to educate people so we can get our government to work for us rather than the other way around.

The first thing that needs to be accepted is that all public sector employees are directly employed by a company. That company on the municipal level, ends up being municipal governments, on the provincial level, ends up being provincial governments and on a federal level, the federal governments. Btw the reason we have different levels of government is because they are all responsible for different things. This is fairly obvious but I have been told sometimes I gloss over facts that are obvious, but those are obvious to me because I already know them. Look it up, most governments are actually termed corporation of the city of so&so because these governments are actually just companies. That company ends up having shareholders who are its citizens but we don’t actually receive a direct financial dividend like shareholders do. We receive public sector services as our dividends but if those public sector services are not efficient, then that’s the equivalent of receiving a low dividend that should be higher. A dividend that will increase with the implementation of private sector efficiency tools. Currently, we do not know if these services are efficient, so when the government wants to solve a new problem it’s difficult to do so without harming our current standard of living. As I mentioned earlier, private companies are implementing these efficiency improvements because they create value for their shareholders; if private companies see value for their shareholders, then why don’t public companies see it?

Another key difference between public and private corporations is that the CEO in private corporations are beholden to a company’s board of directors (BOD), while in public corporations, this equivalent doesn’t exist. They’re both technically also beholden to their respective shareholders, but if unpopular decisions are made, then there exists a longer time period between when shareholders are able to voice their opinions for public companies. Again for public corporations shareholders, (citizens of a country or province or city) we only get to voice our opinions through voting since the private sector equivalent of a BOD does not exist. We have to wait sometimes 4 to 5 years before were able to to express displeasure over a decision and because of this time period, we sometimes forget.

That is how these private industry tools will help; they are the responsible way to transform government to deliver the services we currently need, without losing to the services we already have. All without trying to implement a public sector equivalent of a BOD.

How democracy has been hijacked

To talk to the point of how Canadians have allowed democracy to be hijacked, it is a subtle point with major ramifications. Our governments transformed the idea of democracy through their implementation of political parties. This is also a key reason why I don’t believe in the Trudeau hype and a reason why I didn’t support Imperial Commander Harper as PM. Both are major proponents of the current broken system. In the ideal form of government, our elected MPs are supposed to answer to their riding, but in the twisted form of democracy we currently have, they do not. In our form of democracy, MPs have to receive the rubber stamp of approval from the party leaders and therefore answer to one man (or woman) before the people who elected them. This is a policy that centralizes power with one man and makes it easier for the system to be corrupted. The system is easier corruptible because now only the PM has to be bought instead of a multitude of MPs. Instead of individual ridings electing MPs, a form of gatekeeper inefficiency is present where the PM can reject a candidate from representing their party in that riding and place their own candidate there. Now party leaders have argued that this allows the party to reject candidates who hold controversial positions (e.g. a Liberal candidate who holds a pro-abortion position but is otherwise Liberal) but I still think this is a way for the rich to easily buy a party and consequently a country.

Remember these political parties themselves are corporations who raise money and peddle influence all in efforts to lead a country with their ideology, in theory. In reality, the imperfections of man can be manipulated with arguments based on self benefit and maybe this is why things don’t get done.

In Canada & the USA certain parties have held a monopoly on the political scene and this is directly a result of policy decisions that have been passed by those monopoly powers (e.g. voter subsidies & 75% tax breaks for political contributions). It has allowed their political oligopoly to wield disproportionate power compared to if those policies did not exist. Those policies have also made it difficult for new political parties to come up. Remember something that they teach all business students is that the more barriers you put up in an industry for new players to come up. Consequently the more the established players can stay and maintain power. Btw for those who’d like to know this is one of the market forces of Porter’s Five Forces. For the record, this is one reason I support Michael Chong for leader of the Federal Conservative party, he has really made effort towards introducing legislation and starting the discussion as to why it’s important to disband this requirement (party leader rubber stamping riding MPs) for the Federal Conservatives. People believed Justin Trudeau when he said that he wouldn’t interfere in a riding electing the MP it wanted. But he was quick to reject entrants into open primaries in certain Toronto ridings (e.g. Christina Freeland’s Toronto riding), thus making it easier for his pick to win the Liberal nomination.

Article was written by gtareguy (Greater Toronto area real Estate guy) . I release a new article every Friday and I write about economics, the nba and real estate in the GTA. 


Author: gtareguy

Real Estate Investor Raptors fan (don't cry for me this year) Mech Eng Graduate

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