Pareto's Rule is Power Law
In The Long Tail, Chris Anderson has interesting insights about power laws like Pareto's Rule (80/20). Anderson says there are three conditions necessary to create a power law:
- Variety (there are many different sorts of things).
In Six Sigma, for example, there are different kinds of defects.
- Inequality (some have more of some quality than others).
In Six Sigma, one defect will occur much more frequently than the others.
In Lean, one delay will be significantly longer than the others.
- Network effects which amplify differences in quality.
In Six Sigma, a defect early in the process causes tsunami-like effects.
Anderson goes on to say the 80/20 rule is chronically misunderstood because:
- It's never exactly 80/20. Sometimes it's 80/10.
- "If you are troubled by the fact that 80/10 doesn't add up to 100 [it's because] the 80 and the 10 are percentages of different things." The 10 is a percentage of defects and 80% is the percentage of waste or rework caused by the defects.
- It's often misapplied. When I was in the phone company, one VP adopted Jack Welch's rule that 10% of employees were underperforming, slowing the other 90% and should be let go. This led to widespread discontent that dropped the performance of everyone.
The 4-50 Rule
Because Pareto's Rule is a power law, it applies in the 20%. As I like to say: 4% of the process is producing over 50% of the mistakes, waste, rework and lost profit. From a Lean perspective, 4% of the gaps between processing steps consume over 50% of the cycle time.
In other words, the delays, defects and deviation aren't spread all over the business like butter on bread. They tend to cluster in a few areas. When you use data to laser-focus improvement efforts on those key leverage points, dramatic, breakthrough improvements are inevitable.
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