1. LESSON 4 Pareto Analysis and ABC Classification
29 August 2014

2. Lesson Objectives
Upon completion of this lesson, you should be able to:
Identify the purpose of a Pareto analysis
Interpret a Pareto Chart to identify items requiring corrective or preventative action
Determine which items would benefit from tighter inventory control and monitoring by interpreting ABC analysis results

3. Lesson Topics This lesson will cover the following topics:
Pareto Analysis
Steps for Constructing a Pareto Chart
ABC Classification

4. What’s In It For Me?
Your ability to interpret Pareto and ABC analysis results will improve your ability to monitor contractor performance and help you identify high priority issues without being distracted by trivial matters

5. Lesson Introduction
What are common tools used for effective material management?

6. Pareto Analysis Lesson Topics: Pareto Analysis
Steps for Constructing a Pareto Chart
ABC Classification

7. Pareto Analysis
Tool for prioritizing changes and identifying problems needing a resolution
Helps you to focus on the causes that produce the most problems
Also called the 80/20 Rule

8. Vilfredo Pareto Italian economist
Described unequal distribution of wealth
20% of the people owned 80% of the wealth

9. Pareto’s Principle/Law
Dr. Joseph Juran
“Vital few and trivial many”
Attributed his observations to the 80/20 Rule
Named it Pareto’s Principle:
“20% of effort is responsible for 80% results”
Examples:
20% of the input creates 80% of the result
20% of the customers create 80% of the revenue
20% of the bugs cause 80% of the crashes
20% of the workers produce 80% of the work

10. Pareto Chart

11. Steps for Constructing a Pareto Chart
Lesson Topics:
Pareto Analysis
Steps for Constructing a Pareto Chart
ABC Classification

12. Steps for Constructing a Pareto Chart
List problems
Identify frequency
Order by frequency
Calculate percentage
Calculate cumulative percentage
Create Pareto chart

13. Example: Pareto Analysis
Webs4U, a website design company, has been awarded a contract to update a website
During an in-process review, numerous errors are identified
Webs4U will now conduct a Pareto analysis to evaluate the faults

14. Example: Pareto Analysis - Step 1
List problems
Problem
Frequency of Occurrence
% of Total Occurrences
Cumulative %
Broken Links
Missing Images
Script Errors
Spelling Errors

15. Example: Pareto Analysis - Step 2
Identify frequency
Problem
Frequency of Occurrence
% of Total Occurrences
Cumulative %
Broken Links 17
Missing Images 3
Script Errors 7
Spelling Errors 23

16. Example: Pareto Analysis - Step 3
Order by frequency
Problem
Frequency of Occurrence
% of Total Occurrences
Cumulative %
Spelling Errors 23
Broken Links 17
Script Errors 7
Missing Images 3
Frequency must be sorted from most to least frequent

17. Example: Pareto Analysis - Step 4
Calculate percentage
Problem
Frequency of Occurrence
% of Total Occurrences
Cumulative %
Spelling Errors 23
46%
Broken Links 17
34%
Script Errors 7
14%
Missing Images 3 6%
Total Errors: = 50 errors
Spelling Errors: 23 / 50 = 46%
Broken Links: 17 / 50 = 34%
Script Errors: 7 / 50 = 14%
Missing Images: 3 / 50 = 6%

18. Example: Pareto Analysis - Step 5
Calculate cumulative percentage
Problem
Frequency of Occurrence
% of Total Occurrences
Cumulative %
Spelling Errors 23
46%
Broken Links 17
34%
80%
Script Errors 7
14%
94%
Missing Images 3 6%
100%
Total cumulative percentage should equal 100%

19. Example: Pareto Analysis - Step 6
Create Pareto chart
Data for each item in a column/bar chart
Cumulative percentage in a line chart

20. Interpreting a Pareto Chart
Which types of errors are the biggest contributors to the problem?
80% of Total Occurrences

21. Based on the Pareto chart, which issue(s) should be focused upon?
Question and Answer
Based on the Pareto chart, which issue(s) should be focused upon?
Issue A only
Issues A and B
Issues B, C and D
Issues A, B, C and D

22. Exercise: Pareto Analysis
Individual Activity:
Refer to Module 7, Lesson 4, Exercise 1 CMM100_M7_L4_E1_Exercise_FINAL.docx
Read the directions in the exercise.
Complete the activity; be prepared to share your responses
Time allowed: 15 minutes

23. ABC Classification Lesson Topics: Pareto Analysis
Steps for Constructing a Pareto Chart
ABC Classification

24. A B C ABC Classification
ABC Classification is an analysis of items by category
Most often used with inventory control
Can also be used in manufacturing for ranking parts of a process A B C
- Extremely Important
- Moderately Important
- Relatively Unimportant

25. Steps for Conducting an ABC Classification
Classify each item as either A, B, or C
Rank items according to inventory values
Determine the level of control for each classification

26. Example: Joint Light Tactical Vehicle
Tactical Payload Systems, Inc. (TPS) is contractor for engineering, manufacturing, and fielding the Joint Light Tactical Vehicle (JLTV) for the United States (U.S.) Army and U.S. Marine Corps
TPS wants to group the major components used in the JLTV by most expensive to least expensive

27. Example: ABC Inventory
Compute % of Annual Cost
File: CMM100_M7_L4_ABC_Scenario.xlsx

28. Example: ABC Inventory (cont.)
Categorize the items by ABC:
A items
40–99% annual cost
B items
.10–39% annual cost
C items
.009% and below annual cost
Then rank by inventory values

29. Scenario Results
Which category is extremely important for TPS to control?
Items
% of Items
% of Annual Cost A
3/21 = 14.3%
98.35% B
6/21 = 28.6%
1.6% C
12/21 = 57.1%
.02%

30. Question and Answer
In an ABC Classification System, which grouping of items would require the most control for effective inventory management?
A items
B items
C items
All items are treated with the same level of inventory control

31. Exercise: ABC Analysis
Individual Activity:
Refer to Module 7, Lesson 4, Exercise 2 CMM100_M7_L4_E2_Exercise_FINAL.docx
Read the directions in the exercise.
Complete the activity; be prepared to share your responses
Time allowed: 15 minutes

32. Summary Having completed this lesson, you should now be able to:
Identify the purpose of a Pareto analysis
Interpret a Pareto Chart to identify items requiring corrective or preventative action
Determine which items would benefit from tighter inventory control and monitoring by interpreting ABC analysis results

33. Summary (cont.)
Your ability to interpret the results of a Pareto analysis and an ABC analysis will allow you to identify areas of risk to focus your surveillance.

34. Module 7 Wrap Up Activity
Refer to the Module 7 Wrap up Activity
As a team, answer the questions in the Module 7 Wrap Up Activity File
Each team must answer all the questions.
Each Team must be prepared to present their answers.
You have the remaining time as directed by the instructor to complete this activity.