Reading: Learning Curves
Learning Curve Spreadsheet: LEARN.XLS (Excel)
Question 1. Consider two firms. The first, "Big Blue," is a traditional hierarchical firm in which promotions are awarded on the basis of seniority and lack of controversy. Big Blue prides itself on having "invented" the industry which it leads, and seldom looks outside of itself for ideas or knowledge. In contrast, the second firm, "Little Red," is a relatively new in the industry and is characterized by a lack of formality, an ill-defined hierarchy, frequent turn-over in its technical ranks (employees go on to found their own companies), and a culture which values new ideas and creativity regardless of origin.
Both Big Blue and Little Red are engaged in the development and production of a new product which has the potential to revolutionize their industry. Each firm is championing its own competing technology, neither of which dominates the other. Both firms bring their respective products to market at the same time, and the production costs of both are about the same at $1,000 per unit. However, the historical learning rate of Big Blue is 93%, while that of Little Red has recently been 85%. What do you forecast the unit production costs of each firm to be for the 10th unit produced? the 100th? the 1,000th? the 10,000th? What predictions can you make regarding the future success of Big Blue and Little Red with their new products.
Question 2. The ski equipment firm of which you are a part is considering investing in a new process technology for its low-volume high-performance ski line. The new process promises superior quality, and particularly, a better finish which will help retail sales. However, estimates of the new process show that initial manufacturing costs will be about $250 per pair, whereas manufacturing costs are about $150 per pair for the current process. A furious debate is raging in the management ranks about the wisdom of adopting the new process. One camp is adamant that the company should "leave well enough alone." The current process has successfully produced 5,000 pair of skis, is a proven technology, and produces at a significantly lower cost than the proposed process. The second camp argues that improved quality is imperative in the market if the firm desires to maintain share, and that improved consumer perception will be worth the extra cost. Besides, as the company becomes familiar with the new process, manufacturing costs may decline.
To help resolve the controversy, you examine historical production costs for several production processes used by the firm, and conclude that the firm generally follows a 90% learning curve. The company expects to annually manufacture 2,000 pair of these skis for the foreseeable future. What do you recommend?
Question 3. You have accepted a position as marketing manager for WaterPure Inc., a long-established Colorado firm which makes water purification equipment for hikers and backpackers. Shortly after starting your new job, the President of the company approaches you with the following problem. A new competitor, GoodWater Products of Boulder, has just introduced a purification kit for $40 which directly competes with WaterPure's standard kit, priced at $85. The President comments "How can GoodWater undercut us? It must be losing money on every sale! I'll bet that they'll be out of business within 6 months. But just to be sure, I want you to look into what's going on at GoodWater and report back to me."
Talking with your colleagues in the production department, you learn that WaterPure has produced over 10,000 units of its kit. The first kit cost about $100 to produce, and the cost of production has followed a 95% learning curve ever since. The firm's Quality Manager was just recently hired from GoodWater (having decided that a start-up firm was not for her). She reports that GoodWater is using a new production technology which initially gave them serious problems, but that it is now working better GoodWater's first unit cost about $150 to make, but after producing a total of 100 units, costs had dropped to $52.50 per unit. She estimates that GoodWater has produced a total of about 250 units to date, and is producing at a rate of 2,500 kits per year (the same as WaterPure).
Question 4. After one year of production, GoodWater has accumulated
the following production record:
| Cumulative Production |
Unit Cost |
1 |
$150.00 |
100 |
52.50 |
500 |
39.77 |
1000 |
35.38 |
2000 |
32.28 |
3000 |
24.77 |
What has been GoodWater's average learning rate? (Use the Estimate sheet in the Learn.xls workbook.) Is it on track with its original projections?
Copyright © The Regents of the University of Colorado
Stephen R. Lawrence
Associate Professor of Operations Management
Lees School of Business
University of Colorado
Boulder, CO 80309-0419
Stephen.Lawrence@Colorado.edu