Page 26 - DMGT525_MATERIALS_MANAGEMENT

Unit 2: ABC Analysis

2.4 Limitations of ABC Analysis Notes

The Pareto chart is based on the research of Villefredo Pareto. He found that approximately
80 percent of all wealth of Italian cities he researched was held by only 20 percent of the families.
The Pareto principle has been found to apply in other areas, from economics to quality control.
Pareto charts have several disadvantages, however. Following are the main limitations of ABC
analysis:

Easy to Make but Difficult to Troubleshoot

Based on the Pareto principle, any process improvement should focus on the 20 percent of issues
that cause the majority of problems in order to have the greatest impact. However, one of the
disadvantages of Pareto charts is that they provide no insight on the root causes. For example, a
Pareto chart will demonstrate that half of all problems occur in shipping and receiving.

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Caution Failure Modes Effect Analysis, Statistical Process Control charts, run charts and
cause-and-effect charts are needed to determine the most basic reasons that the major
issues identified by the Pareto chart are occurring.

Multiple Pareto Charts May Be Needed

Pareto charts can show where the major problems are occurring. However, one chart may not be
enough. To trace the cause for the errors to its source, lower levels of Pareto charts may be
needed. If mistakes are occurring in shipping and receiving, further analysis and more charts are
needed to show that the biggest contributor is in order-taking or label-printing. Another
disadvantage of Pareto charts is that as more are created with finer detail, it is also possible to
lose sight of these causes in comparison to each other. The top 20 percent of root causes in a
Pareto analysis two to three layers down from the original Pareto chart must also be compared
to each other so that the targeted fix will have the greatest impact.

Qualitative Data versus Quantitative Data
Pareto charts can only show qualitative data that can be observed. It merely shows the frequency
of an attribute or measurement. One disadvantage of generating Pareto charts is that they
cannot be used to calculate the average of the data, its variability or changes in the measured
attribute over time. It cannot be used to calculate the mean, the standard deviation or other
statistics needed to translate data collected from a sample and estimate the state of the real-
world population. Without quantitative data and the statistics calculated from that data, it isn’t
possible to mathematically test the values. Qualitative statistics are needed to know whether or
not a process can stay within a specification limit. While a Pareto chart may show which problem
is the greatest, it cannot be used to calculate how bad the problem is or how far changes would
bring a process back into specification.

Self Assessment

Fill in the blanks:
11. Pareto charts can only show ……………….. data that can be observed.

12. ………………………… cannot be used to calculate how bad the problem is.

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