Apr 24 2014
See on Scoop.it – lean manufacturing
“Learning Curves have traditionally been used for cost estimating and training purposes. However, they have a much wider applications, including Manufacturing and Marketing strategy. They underly the concept of Continuous Improvement. Like compound interest, they generate large benefits from seemingly small, incremental change.
The learning curve came into prominence during World War II when Army Air Force scientists noticed that the cost for a given aircraft model declined with increased production in accordance with a fairly predictable formula. Each time the cumulative production doubled, cost declined by a fixed percentage. In the aircraft industry, at that time, this reduction was about 20%. Learning curves underpin the concept of Continuous Improvement.”
It’s good to see a well-documented, informative article by Quarterman Lee on a topic that is often ignored in the Lean literature but that I think if fundamental to the economics of improvement.
The title mentions both Learning and Experience Curves, but the body of the article is only about Learning Curves. The difference between the two is that Learning Curves are only about labor, and were developed first, in World War II, as Quarterman points out. The Experience Curve is a generalization due to Bruce Henderson of the Boston Consulting Group in the 1960s, which applies the logic not just to labor but to all costs.
The Experience Curve theory is predicated on the notion that there is such a thing as a meaningful cost per piece, and asserts that it decreases with cumulative volume along an inverse power curve, the evidence for which is in the evolution of market prices with cumulative volume in a variety of industries.
The effect of this curve on pricing in an industry depends on its clockspeed. In electronics, with product lives of four years, it is dominant. In cars, where the experience accumulated for over a century is still relevant today, we are so far on the curve that it is not a major factor.
The justification for an inverse power law is in fact simple. It stands to reason that, the more you have already made of a product, the easier it is to make the next unit, and therefore that costs should decrease as a function of cumulative volume. Since we are talking about a broad trend, it should also be a smooth decline.
Could it be linear? No. It would mean a straight line in cartesian coordinates.and that would lead to negative costs, which makes no sense. If you toggled the y-axis to “logarithmic,” a straight line would represent an exponential decline. But it would not make sense either, because it would mean that you could produce an infinite volume for a finite cost. If, as in the above picture, you make both axes logarithmic, a straight line means an inverse power law. Costs never go negative, and it still takes an infinite amount of money to produce an infinite quantity. This is why, among the simple possible decline patterns, it is the only one that cannot be excluded based on its logic.
See on www.strategosinc.com