W2.0_MA_Evaluate Monthly Expenses using Pareto Chart Analysis

Problem Definition

Due to the economic condition of Indonesia, where there is a decrease in purchasing power. It is necessary to do an analysis to determine which monthly expenditures can be immediately adjusted so it will not disrupt the personal cash flow.

Development of the Feasible Alternatives

We need to recognize the possible substances based on historical data traced. Therefore, we will find out that there are top substances leading monthly personal expenditures that have possibilities to be reduced. Some expenses such as insurance, housing, car and personal loan are excluded as they are the auto debt contract basis.  The substances are:

• Monthly Bills include Electricity, Water, Gas, Communication, etc.
• Credit Card
• Transportation
• Entertainment
• Misc. Shopping

Possible solution / alternative

To solve the problem in above, we can use pareto analysis. The analysis was introduced by Italian economist Vilfredo Pareto in 1906. Forty years after Pareto published his idea, business theory expert Joseph Juran was interested in the 80/20 rule, and wondered if it could apply to business situations. Juran, using Pareto’s work, began applying what he called the Pareto principle to quality issues, using the phrase “a little vital and trivial”. Then, Juran realizes that while a small percentage of causes or problems may be most significant at the moment, there is an actual implication for 80% problems that can over time become serious. Thus, in later years, Juran changed the phrase explaining the Pareto principle to “a little vital and much useful”.

Selection of Criteria

Table 1 – Monthly Personal Expenditures

We need to find only 20% of the significant cost substances which will cover minimum 80% of the total cost. With Pareto analysis, we will know where should focus in efforts to reduce the monthly expenditure.

Analysis and Comparison of The Alternatives

 

Figure 1 – Pareto Chart Result

From the figure 1, we can interpret that the tallest bar indicates the most significant cost to the overall monthly expenditure. In addition, the break point happened after Transportation’s bar. The break point is percentage point on the line graph for Cumulative Frequency at which there is a significant decrease in the slope of the plotted line.

Selection of Preferred Alternative

From five (5) substances which identified in above, we should focus only to Monthly Bills, Credit Card and Transportation when adjusted the cost. It’s means that we have solved almost 80% of the overall issues.

Performance Monitoring and the Post Evaluation of Result.

After identifying substances with almost 80% of the overall expenditures, we need to consider a list of activities which could reduce the monthly expenditure, such as efficient in usage of water, electricity, and telephone for monthly bills; limiting the use of credit card which only for urgent purposes; and more frequent on using the public transport.

Finally, we will monitor and review in quarterly basis or after we have significant improvement on reducing the expenditures.

 

Reference

Haughey, Duncan, Pareto Analysis Step by Step, Retrieved from https://www.projectsmart.co.uk/pareto-analysis-step-by-step.php

Pareto Analysis, Retrieved from https://www.mindtools.com/pages/article/newTED_01.htm

Brassard, M. & Ritter, D. (2016), The Memory Jogger 2, Tools for Continuous Improvement and Effective Planning, Second Edition, USA, GOAL/QPC,122-135

Week 5.0 – YE– “Using Pareto Chart Analysis” | Mercure’s Blog, Retrieved from https://mercureaace2013.wordpress.com/2013/04/04/w8_ye_using-pareto-chart-analysis/