Pareto's rule states that a small number of causes is responsible for a large percentage of the effect, in a ratio of about 20:80.
Expressed in a management context, 20% of a person's effort generates 80% of the person's results. The corollary to this
is that 20% of one's results absorb 80% of one's resources or efforts. For the effective use of resources, the manager's
challenge is to distinguish the right 20% from the trivial many.

Pareto’s law

Vilfredo Pareto (1848-1923) was an Italian economist who, in 1906,observed that twenty percent of the Italian people owned eighty percent of their country's accumulated wealth. Over time and through application in a variety of environments,
this analytic rule has come to be called Pareto's Principle, the 80-20 Rule, and the "Vital Few and Trivial Many Rule."
Called by whatever name, this mix of 80%-20% reminds us that the relationship between input and output is not balanced.

This metaphor is a useful heuristic that applies when there is a question of effectiveness of invested resource. Practical applications can be:

Sales/Marketing/Financial management: to increase profits, focus attention on the vital few (top 20%) by first identifying and ranking customers in order of profits and then focusing sales activities on them. The 80-20 Rule predicts that 20% of the customers generate 80% of the revenues, and 20% yield 80% of the profits, but these two groups are not necessarily the same 20%.

• Quality improvement: a great majority of problems (80%) are produced by a few key causes (20%). If we correct these few key causes, we will have a greater probability of success.
  
• Personal Productivity: To maximize personal productivity, realize that 80% of one's time is spent on the trivial many activities. Analyse and identify which activities produce the most value to your company and then shift your focus so that you concentrate on the vital few (20%).What do you do with those that are left over? Either delegate them or discontinue doing them.
  
• Stock management: 20% of your stock takes up 80% percent of your warehouse space
  80% percent of your stock comes from 20% of your suppliers.
  
• People management: 20% of your staff demands 80% of your attention

Pareto Chart

A pareto chart is used to graphically summarize and display the relative importance of the differences between groups of data.

Sample Pareto Chart Depiction

How To Construct A Pareto Chart

A pareto chart can be constructed by segmenting the range of the data into groups (also called segments, bins or categories). For example, if your business was investigating the delay associated with processing credit card applications, you could group the data into the following categories:

• No signature
• Residential address not valid
• Non-legible handwriting
• Already a customer
• Other

The left-side vertical axis of the pareto chart is labeled Frequency (the number of counts for each category), the right-side vertical axis of the pareto chart is the cumulative percentage, and the horizontal axis of the pareto chart is labeled with the group names of your response variables.
You then determine the number of data points that reside within each group and construct the pareto chart, but unlike the bar chart, the pareto chart is ordered in descending frequency magnitude. The groups are defined by the user.

Source: Kerry Simon

Vilfredo Pareto, 1848-1923

Vilfredo Pareto was born in the year of people's revolutions at its epicenter -- Paris, 1848 -- to an Italian aristocratic family. His father, a Ligurian marchese (marquis) and civil engineer, had fled to Paris in 1835 in self-imposed exile.
The Pareto family returned to Piedmont circa 1858. Following his father's footsteps, Vilfredo Pareto studied classics and then engineering at the Polytechnic Institute of Turin. It was here that he acquired his proficiency in mathematics and his basic ideas about mechanical equilibrium that were to characterize his later contributions to economics. After graduating at the top of his class in 1870, Pareto took his first job as a director of the Rome Railway Company. In 1874, Pareto become the managing director of an iron and steel concern, the Società Ferriere d'Italia in Florence.

In 1906, Pareto published his Manual of Political Economy, his magnum opus on pure economics. The Manual concentrates on presenting pure economics in an explicitly mathematical form formulating equilibrium in terms of solutions to individual problems of "objectives and contraints".
Pareto retired from his chair at Lausanne in 1907, gradually passing on his teaching responsibilities to Pasquale Boninsegni. Pareto used his time at Céligny to write his Trattato di sociologia generale, which was finally published, after wartime delays, in 1916. This was his great sociological masterpiece. He explains how human action can be neatly reduced to residue and derivation. People act on the basis of non-logical sentiments (residues) and invent justifications for them afterwards (derivations). The derivation is thus just the content and form of the ideology itself. But the residues are the real underlying problem, the particular cause of the squabbles that leads to the "circulation of élites". The underlying residue, he thought, was the only proper object of sociological enquiry.
Residues are non-logical sentiments, rooted in the basic aspirations and drives of people. He identifies six classes of residues, all of which are present but unevenly distributed across people -- so the population is always a heterogeneous, differentiated mass of different psychic-types. The most important residues are Class I the "instinct for combining" (innovation) and Class II, the "persistence of aggregates" (conservation). Class I types rule by guile, and are calculating, materialistic and innovating. Class II types rule by force and are more bureaucratic, idealistic and conservative.
The Fascists showered Pareto with honors from afar, making him a Senator of the Kingdom of Italy, inviting him to join the Italian delegation to the Geneva Disarmament Conference, asking him to contribute to the Fascist party periodicals, etc. He declined most of the honors, but spoke favorably of certain early reforms undertaken by the Fascists. However, he also warned them to avoid despotism, censorship and economic corporatism. When the Fascists clamped down on freedom of expression in Italian universities, Pareto managed to rouse himself to write a protest. Pareto died a mere ten months into Mussolini's reign -- before the uglier aspects of Fascism became obvious.
Despite his association with Fascism, Pareto's sociological work has been taken seriously, going through recurring phases of popularity and critical scrutiny. Freudian psychology has given much weight to some of his notions. It is not so much its main thrust, but its roughness, simplicity and incompleteness that are the main sources of complaint.
Pareto's economics have had a much greater impact. Pareto managed to construct a proper school around himself at Lausanne, including G.B. Antonelli, Boninsegni, Amoroso and others as disciples. Outside this small group, his work also influenced W.E. Johnson, Eugen Slutsky and Arthur Bowley. But Pareto's big break came posthumously in the 1930s and 1940s, a period which we have decided to call the "Paretian Revival".