Pareto Chart Case Study

The concept is over 100 years old. It's often referenced in every management book ever written. And it all began with an Italian economist who noticed a simple disparity in incomes. But few people know how to leverage its power in business.

In 1995 an employee (Jay Arthur) struggling with the complexities and inherent problems in a huge telecommunications company was sitting at his desk staring at a vast spreadsheet of facts and figures about postage costs for the company's bills. With a cranky VP sitting upstairs he decided to do a simple analysis. There had to be a pattern to the steady increases in postage costs. It wasn't the postal service or ride-along coupons, so it had to be something else.

More and more of the company's bills were being mailed at the two-ounce rate instead of the one-ounce rate. So either the postage meters were wrong or the bill was getting heavier.

On top of this, every month thousands of bills were returned due to bad addresses. The employee went through the bins of returned bills looking for any bill over the one ounce rate. One by one he opened them up looking for the secret to unlocking the increased postage costs.

It only took a few dozen bills to discover the culprit. The company had begun billing for smaller telecommunications companies. Each company got their own page in an already thick envelope. Page by page and company-by-company, the bill was steadily creeping over the one ounce limit. Of course, the product manager who sold the billing service hadn't priced it to cover the increases in postage costs.

Based on the employee's research, a team redesigned the bill to be smaller, lighter and more readable. In the year after its implementation, postage costs fell by $20 million a year.

What chart did he use to display the problem and garner support for the redesign?

The humble Pareto Chart.

He used it again to save $16 million a year in billing adjustments.
And again to save $3 million a year in service order errors.
And $5 million a year in denied claims for a hospital system.

Isn't it time you discovered the power of the pareto chart to focus your improvement efforts?