The Experience Curve

Prof M G Korgaonker
 The Experience Curve

Learning Curve

• A curve which depicts the relation between direct labour hours per unit and
cumulative units produced

Experience Curve

• A curve which indicates the relationship between cost per unit and cumulative
units produced. Cost is usually adjusted for inflation. Cost implies value added
by the organization, rather than cost per unit
 The Experience Curve

Theoretical Model of Learning Curve

• Learning curve model can be written as

Yi = A i-b

Yi = Direct labour hours required to produce the I th unit

i = Cumulative production, beginning with the 1 st unit

A = Labour hours required for the 1 st unit

b = The rate of learning exponent value

 The Experience Curve

Y1 = A Y2 = A 2-b Y2/Y1 = 2-b

Y4 = A 4-b Y4 / Y2 = ( 4-b / 2-b) = 2-b

• And so on. Every time the cumulative production doubles, the labour hours
per unit reduce by a factor of 2-b. If this is equal to 0.8, we say the learning
curve is 80 %

• Thus 2-b is viewed as learning curve factor or learning rate. For given values of
b, we can tabulate the values of 2-b. See the following table1
 The Experience Curve

b = Exponent of Learning Rate 2-b = Learning Rate, %

0.000 100
0.074 95
0.152 90
0.235 85
0.322 80
0.415 75
0.515 70
0.623 65
0.738 60

Table 1 : Exponent b and Learning Rate

 The Experience Curve

• Sometimes average labour hour per unit is used to approximate learning

curve, when labour requirement for incremental unit of production is not
readily available

• Cumulative direct labour hours required to produce i units is

Ti = Y1 + Y2 + Y3 +………………. + Yi
= A + A 2-b + …………….. + A i-b
= A Σ n =1i ( n-b )
= A ∫1i ( n-b ) dn
= A [ ( n-b+1 ) / ( 1 – b ) ]1i
= A ( i1-b ) / ( 1 - b )
 The Experience Curve

• Cumulative average direct labour hours per unit

= Ti / I = ( A i-b ) / ( 1 - b ) = Yi / ( 1 - b )
 The Experience Curve
Cum Hours For This Cum Av Hr Cum Hours For This Cum Av Hr
Production Unit Per Unit Production Unit Per Unit
1 716 716 150 67 120
2 516 616 200 58 106
10 240 371 250 52 96
12 221 347 300 48 88
15 198 319 400 42 77
20 173 285 500 38 70
40 125 214 600 35 64
60 103 180 700 32 60
75 93 163 800 30 56
100 81 144 840 29 55

Labour Hours / Unit And Cum Av labour Hours / Unit

 The Experience Curve

Relating Learning to Productivity Improvement

• Learning curve measures the reduction in labour hours per unit achieved
during a specified increase in cumulative volume,

• Labour productivity improvement measures the reduction in labour hours per

unit achieved during a specified time period
 The Experience Curve

► 5 % Growth / Year
►
►
►
Labour Hours / Unit

►
►
◄
◄
30 % Growth / Year ◄
◄ Learning Curve
◄

Cumulative Volume
 The Experience Curve

Additional Practical Concerns In Applying Learning / Experience Curves

What Constitutes 1 st Unit of Production

• For example, if a firm starting from 1 st unit produces 10000 units, the
production volume is doubled 13 times and costs are reduced dramatically

• If however a firm starts with 10000 units of previous experience, the cost will
be reduced much more slowly

• Therefore, it is important to define rather accurately the 1 st unit of

production
 The Experience Curve

Additional Practical Concerns In Applying Learning / Experience Curves

Cost Decline During Start Up

• Often during “ Start Up ” phase of a plant, the product’s learning curve

displays a steep rate of descent

• As start up phase evolves into “ Regular Production ”, learning curve

approaches that of related products

• This results in “ Hockey Stick” experience curve

Cost / Unit The Experience Curve

Cost / Unit
Cumulative Volume Cumulative Volume
( Hockey Stick Shape )
 The Experience Curve

Consideration of Reference Unit For Calculations

• Which unit should be considered as “ Reference Unit” for calculations ?

• If 1 st unit is used, the extent of cost variations due to different “ Learning

Rates” will be significantly more than when the “ Reference Unit” is the one
chosen after start up problems are overcome and production stability is
attained
 The Experience Curve

Use of Cost Data

• All costs should be stated in “ Comparable” units than inflated units. So effect
of inflation must be removed from observed costs

• This requires correct deflators for each cost category, which are not easy to
compile

• Hence it is useful to look at both current rupees and constant rupees

 The Experience Curve

Management Actions For Improvement of Learning Rates

Labour Efficiency

– Quality and stability of workforce

– Compensation and incentives ( during start up and regular periods )

– Ways of organizing and supervising the work force ( methods of job

enrichment / enlargement, work autonomy, etc )
 The Experience Curve

Management Actions For Improvement of Learning Rates

New Processes and Methods

• Changes in manufacturing technology

• Transition through different stages of process life cycles ( for ex : job shop
process to line flow structure )
 The Experience Curve

Management Actions For Improvement of Learning Rates

New Processes and Methods

• For ex TI sold digital watch for $ 69.95 using decoupled line flow process

• With more standardized watch design, new production process and advanced
components, the selling price was $ 19.95

• With further method changes, value engg, etc the price was reduced to $ 9.95,
within a year
 The Experience Curve

Management Actions For Improvement of Learning Rates

Overcapacity Plants

– These enable increase of production without capital cost beyond a certain

range of rated capacity, thus enabling reduction in unit cost

Product Redesign

– Design for manufacturability, substituion of cost effective materials and

parts, etc are ways by which prodcuts can be redesigned to bring about cost
reduction without sacrificing functions or other activities
 The Experience Curve

Management Actions For Improvement of Learning Rates

Scale Economies

– Situation resulting in both static and dynamic economies of scale can result
in reduced unit cost in the short term, intermediate term and long term

Product Standardization

– Even while maintaining product differentiation at the finished stage level,

low level standardization of parts, materials, variety reduction can help
reduce unit cost
 The Experience Curve

Management Actions For Improvement of Learning Rates

Shared Experience
• A common experience base can be an important source of cost improvement, in
a multi product company. This requires organizational emphasis on “ Shared
Experience”

Growth Rates
• Improved marketing, aggressive manufacturing actions to lower costs, improve
quality, delivery, shift towards long term contract relationships with vendors,
etc. can help increase “ Growth Rates ” and climb down the experience curve
much faster
 The Experience Curve

Steps In Experience Curve Based Cost Reduction Programmes

• Analyze historical price and production cost patterns in order to develop cost
and price experience curves

• Obtain estimates of future prices ( in constant rupees ) and volumes over a 5 yr

time horizon

• Develop alternative cost improvement curves, reflecting different assumptions

about capital investment and allocation of other mfg resources
 The Experience Curve

Steps In Experience Curve Based Cost Reduction Programmes

• Project the experience and price curves of the business five years into the
future

• Select a set of projects that provide the promised annual reductions in cost.
Such projects could be selected from a wide range : direct labour efficiency,
production process changes, product design changes, scale economies, etc

• Monitor actual costs and compare with projections. Take corrective actions,
where possible. Identify additional projects for cost improvement
 The Experience Curve

Implementing Experience Curve Based Cost Competitive Strategies

Aggressive Pricing

• Price ahead in anticipation of expected cost reduction, to discourage

competition and stimulate simultaneous market growth. Support with other
sales stimulating activities

• As market grows, sales increase, cum experience increases. The firm moves
much faster down the experience curve
 The Experience Curve

Implementing Experience Curve Based Cost Competitive Strategies

Coordinated Engineering

• Engineering should work closely with manufacturing to design products for

manufacturability, using processes which permit gradual substitution of
capital for labour

Financial Resources

• Expand capacity ahead of demand, to support volume growth and process

improvement
 The Experience Curve

Implementing Experience Curve Based Cost Competitive Strategies

• It must be noted that experience curve strategy is a competitive strategy. This

is not necessarily the best strategy in all situations

• For example, competing through “ Niche Markets”, “ Flexibility”,

“ Innovation” have also proved successful

• See Table 2 for impact of cost of different items ( with different cum levels of
experience ) on the total product cost
 The Experience Curve
High ?
Cash Use
( Growth Rate ) Modest +ve or – ve Large – ve
Cash Flow Cash Flow

Optimum Cash Flow

Low $ X
Cash Use
( Growth Rate ) Large + ve Modest + ve or – ve
Cash Flow Cash Flow

Experience Curve and Corporate Strategy

 The Experience Curve

Strategy Characteristics

1. Low Growth / Dominant Share ( Cash Cows )

• Utilize excess cash to support growth opportunities

• Maintain market dominance through investment in cost reduction and

technological leadership

• Exercise price leadership

 The Experience Curve

Strategy Characteristics

2. High Growth / Dominant Share ( Stars )

• Report substantial profits but need significant cash to finance their growth.

• Protect existing market position through product improvements, increased

market coverage and price reductions, all designed to “ Maintain ” market
share

• Experience based pricing strategy is particularly useful for cash cows and stars
 The Experience Curve

Strategy Characteristics

3. Low Growth / Low Share ( Dogs )

• Have cost disadvantage as they are not far down the experience curve. Could
“ Focus ”the activities on “ Specified Market Niche”

• Gradually convert assets into cash

• Sell business to other companies that have skills and resources necessary to
increase its “ Market Share ”
 The Experience Curve

Strategy Characteristics

4. High Growth / Low Share ( ? )

• Poor profits and substantial cash requirements.

• If not funded adequately, will evolve into “ Dogs” with market maturity

• Either get out of business or invest heavily to gain market share, before market
growth slows
 The Experience Curve

Determining Growth Rate For Cost Parity

• Let company A volume growth rate be p% per year

• Let company B volume growth rate be q% per year
• Company A and B’s current annual volume outputs are equal at
V per year each
• Both the companies have experience curves with a factor b
• Company A’s initial unit cost = c
• Company B’s initial unit cost = d
 The Experience Curve

Determining Growth For Cost Parity

After n years, the annual volume outputs of the two companies

will be as follows :

Company A , annual volume after n years = V ( 1 + p )n

Company B, annual volume after n years = V ( 1 + q )n

 The Experience Curve

Determining Growth For Cost Parity

For company A, cumulative volume in n years

= V [1 +( 1+p) + …….+ ( 1+p)n]

= V [(1+p)n+1-1]/ p

For company B, cumulative volume in n years

= V[(1+q)n+1-1]/ q
 The Experience Curve

Determining Growth For Cost Parity

For company A, unit cost after n years will be

cn = c {(V/p) [(1+p)n+1 -1]}-b

For company B, unit cost after n years will be

dn = d {(V/q) [(1+q)n+1 -1]}-b

 The Experience Curve

Determining Growth For Cost Parity

If after n years, the two costs are equal, we obtain

{ [(1+p)n+1-1]/p }-b =( d/c ){[(1+q)n+1-1]/q }-b

In the present case, p = 0.16, b = 0.415, n = 4, d/c = 14/7.5 = 1.87

LHS = [(1.165-1)/0.16]-0.415 = 0.449

 The Experience Curve

Determining Growth For Cost Parity

• We find by trial and error, q = 1.00

• Company B has to grow at 100 % annually for its unit cost to

equal company A after 4 years from now
The Experience Curve

Thank You