Learning Curve Analysis

SUPPLEMENT D

Supplement

Learning Curve Analysis

A. Two types of learning q Individualwith instruction and repetition, workers learn to perform their jobs more efficiently q Organizational Experience in product and process design Automation, capital investment Methods changes B. The Learning Effect [Discuss the general learning curve concept.] 1. Background a. First developed in aircraft industry b. Each doubling of quantity reduced per-unit production time by 20%. c. Rate of learning may be different for different products and different companies. 2. Learning curves and competitive strategy a. Learning curves enable managers to project the manufacturing cost per unit for a given cumulative production quantity. b. Product design changes disrupt the learning effect. c. Firms making standardized products compete on low cost and use high volume to quickly move costs down the learning curve. Low costs discourage competitors from entering the market. C. Developing Learning Curves 1. The direct labor required for the nth unit kn, is kn = k1nb where b= r = learning rate log r log 2

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Learning Curve Analysis

SUPPLEMENT D

2. Assumptions a. The direct labor required to produce the n+1st unit will always be less than the direct labor required for the nth unit. b. Direct labor requirements will decrease at a declining rate as cumulative production increases. c. The reduction in time will follow an exponential distribution. Use Application D.1: Estimating Direct Labor Requirements (AP D.1) for an exercise using the learning model. D. Using Learning Curves 1. Bid preparation q Use learning curves to estimate labor cost. q Add material costs and profit to obtain bid amount. 2. Financial planning q Use learning curves to estimate cash needed to finance operations. 3. Labor requirement estimation q Estimate training requirements. q Develop hiring plans. Use Application D.2: Estimating Cumulative Labor Hours (AP D.2) for an example of using the learning model to test budget constraints. E. Managerial Considerations in the Use of Learning Curves 1. It may be difficult to obtain a good estimate of the learning rate for an organization. 2. The simpler the product, the less the learning rate. 3. The entire learning curve is based on the time required for the first unit, which may itself be the result of an estimation process. 4. Learning curves are used to greatest advantage in the early stages of new product or service production. 5. Implementing team approaches change organizational learning rates. 6. Learning curves are only approximations.

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