Assignment # 4

LEARNING CURVE, ITS DIFFERENT SHAPES AND RANGE

Prepared for

Dr. Muhammad Ziaulhaq Mamun

Professor
Course Instructor: Managing operations (P501)

Prepared by

Sayma Zerin
ID # 03
MBA 57D

Institute of Business Administration

University of Dhaka
Dhaka
March 07, 2018
Learning Curve Definition:

Learning curves are mathematical models used to estimate efficiencies gained when an activity
is repeated. A learning curve is a concept that graphically depicts the relationship between cost
and output over a defined period of time, normally to represent the repetitive task of an
employee or worker. The learning curve was first described by psychologist Hermann
Ebbinghaus in 1885 and is used as a way to measure production efficiency and to forecast costs.
In the visual representation of a learning curve, a steeper slope indicates initial learning
translates into higher cost savings, and subsequent learnings result in increasingly slower, more
difficult cost savings. The “learning effect” was first noted in the 1920s in linking with aircraft
production by T. P. Wright.

The first works on organizational learning curves date back to the 1930s, based on a simple yet
powerful finding: unit costs decline with cumulative output. This effect happens beyond
economies of scale or increased inputs of labor and capital, and it reflects learning by doing at
the organizational level.

The learning curve theory is based on three assumptions: (1) the amount of time required to
complete a given task or unit of a product will be less each time the task is undertaken, (2) the
unit time will decrease at a decreasing rate, and (3) the reduction in time will follow a
predictable pattern. This is often referred to as "practice makes perfect."

An 80% learning curve means that the cumulative average time (and cost) will decrease by
20% each time output doubles. In other words, the new cumulative average for the doubled
quantity will be 80% of the previous cumulative average before output is doubled.

If production has been in progress for some time, the learning percentage can be obtained from
production records. The longer the production history, the more accurate the estimate will be.
For new production projects, it is more a function of guesswork and expert opinion to estimate
a learning curve percentage.

A firm's learning rate may differ from that of the industry due to differences in operating
characteristics or even procedural differences. Often the rates will vary whether the industry
rate is based on a single product or an entire product line. The manner in which the data were
aggregated will cause rates to vary. Learning curves and organizational knowledge can
depreciate if key individuals leave the organization or if technologies become inaccessible or
difficult to use. Learning curves provide an excellent means to examine performance and can
be used in a variety of settings as the closing example of heart transplant successes indicates.

Mathematical Representation:

In general, the learning curve relationship is expressed as a constant percentage. This

percentage represents the proportion by which the amount of an input (or cost) per unit of
output is reduced each time production is doubled. The slope of the learning curve represents
the rate in which learning translates into cost savings for a company. The steeper the slope, the
higher the cost savings per unit of output. The standard learning curve is known as the 80%
learning curve.

There are two different learning curve models. The original model was developed by T. P.
Wright in 1936 and is referred to as the Cumulative Average Model or Wright's Model. A
second model was developed later by a team of researchers at Stanford. Their approach is
referred to as the Incremental Unit Time (or Cost) Model or Crawford's Model.

In Wright's Model, the learning curve function is defined as follows:

Y = aXb
Where: Y = the cumulative average time (or cost) per unit.
X = the cumulative number of units produced.
a = time (or cost) required to produce the first unit.
b =log (learning rate)/log2

The equation used in Crawford's model is as follows:

Y = aKb
where: Y = the incremental unit time (or cost) of the lot midpoint unit.
K = the algebraic midpoint of a specific production batch or lot.

Types of learning curve:

Range of learning curve:

Learning curves result in a fixed percentage decline in unit costs with each doubling of
cumulative volume. Learning curves range from around 70% to 100%. A 70% learning curve
(doubling of volume drops costs by 30%) is considered very aggressive; a 95% curve (doubling
of volume drops costs by 5%) is considered very conservative. Labor-intensive operations
normally have curves in the 80%-85% range; machine-intensive operations have curves in the
90%-95% range.
A learning curve below 70% is rare. A 100% learning curve indicates no learning at all. On the
other hand, a 50% learning curve would indicate that no additional time or cost would be
required for additional units beyond the first unit, since the cumulative average time, (in
Wright's model) or the incremental unit time (in Crawford's model) would decrease by 50%
each time output doubled. This means that the cumulative total time would not increase because
it would equal 100% of the previous cumulative total time.

Relationship with cost, time, efficiency and productivity:

Learning Effect leads to fall in the cost of production per unit because with the increased
involvement in the production process labor and managers become more and more familiar
with the production process. This leads to improvement in their efficiency level. Here
‘Efficiency’ means greater amount of output generated per labor unit over the same amount of
input of labor hours in the process of production. This happens on account of following factors:

The labor units or the workers who are engaged in the production or manufacturing process
become familiar with the process of production with the passage of time. Thus, they require
less time or labor hours to generate same amount of output which they were earlier producing
by using more labor hours. Managers who are involved in the management and scheduling of
the production process also get familiar with the process and are thus in better position to use
the resources at their disposal in better manner as well as scheduling the production process
more efficiently thus leading to more output for the same amount of input.

Costs may drop as a firm pursues the learning curve, but volume must increase for the learning
curve to exist. The learning-curve effect also states that time per repetition decreases as the
number of repetitions increases.