- It has been applied not only to labor but also to a

Learning Curves wide variety of other costs, including material and

Unit 5 purchased components

Learning Curves in Services and Manufacturing

Learning Curves The rate of learning varies depending on the quality of
 The premise that people and organizations get management and the potential of the process and
better at their tasks as the tasks are repeated; product. Any change in process, product, or personnel
sometimes called experience curves disrupts the learning curve. Therefore, caution should be
 It is so significant that it plays a major role in many exercised in assuming that a learning curve is continuing
strategic decisions related to employment levels, and permanent.
costs, capacity, and pricing.
The lower the number (say 70% compared to 90%), the
The learning-curve effect states that time per repetition steeper the slope and the faster the drop in costs.
decreases as the number of repetitions increases.
By tradition, the learning curves are defined in terms of
the complements of their improvement rates.

a 70% learning curve implies a 30% decrease in time

each time the number of repetitions is doubled. A 90%
curve means there is a corresponding 10% rate of
improvement.

Stable, standardized products and processes tend to

have costs that decline more steeply than others.
Between 1920 - 1955, for instance, the steel industry
was able to reduce labor hours per unit to 79% each
A learning curve graph displays labor hours per unit time cumulative production doubled.
versus the number of units produced.
Learning curves as useful for a variety of purposes:
The time needed to produce a unit decreases, usually
following a negative exponential curve, as the person or 1. Internal: labor forecasting, scheduling, establishing
company produces more units. costs and budgets
2. External: supply chain negotiations
In other words, it takes less time to complete each 3. Strategic: evaluation of company and industry
additional unit a firm produces. However, the time performance, including costs and pricing
savings in completing each subsequent unit decreases.
Failure to consider the effects of learning can lead to
 Based on a doubling production: when production overestimates of labor needs and underestimates of
doubles, the decrease in time per unit affects the material needs.
rate of the learning curve.
If the learning curve is an 80% rate, the second unit Applying the Learning Curve
takes 80% of the time of the first unit, the fourth unit A mathematical relationship enables us to express the
takes 80% of the time of the second unit, the eighth unit time required to produce a certain unit. This relationship
takes 80% of the time of the fourth unit, and so forth. is a function of how many units have been produced
before the unit in question and how long it took to
T x Ln=time required for thenth unit produce them.
where:
Costs drop and efficiency goes up for individual firms
T = unit cost or unit time of the first unit
and the industry. Therefore, severe problems in
L = learning curve rate
scheduling occur if operations are not adjusted for the
n = number of times T is doubled
implications of the learning curve.
History For instance, if the learning-curve improvement is not
considered when scheduling, the result may be labor
- Learning curves were first applied to industry in a
and productive facilities being idle a portion of the time.
report by T.P. Wright of Curtis-Wright Corp. in
1963.
Furthermore, firms may refuse additional work because
they do not consider the improvement in their own
The learning rate for a particular operation is 80%, and
efficiency that results from learning. From a supply-
the first unit of production took 100 hours, the hours
chain perspective, our interest is in negotiating what
required to produce the third unit may be computed as
our suppliers’ costs should be for further production of
follows:
units based on the size of an order. The foregoing are
only a few of the ramifications of the effect of learning
T N =T 1 ( N )
b
curves.
T N =(100 hours ) ( 3 b )
Arithmetic Approach
T N =(100 hours ) ( 3 log.8/ log 2)
 the simplest approach
T N =(100 hours ) ( 3−.322 )
Learning Rate - each time that production doubles, T N =70.2labor hours
labor per unit declines by a constant factor
The logarithmic approach allows us to determine the
So, if the learning rate is 80% and the first unit produced hours required for any unit produces, but there is a
took 100 hours, the hours required to produce the simpler method.
second, fourth, eighth, and sixteenth units are as follows:

 arithmetic analysis does not tell us how any hours

will be needed to produce other units
For this flexibility, we must turn to the logarithmic
approach

Logarithmic Approach

 allows us to determine labor for any unit, T N , by the

formula
T N =T 1 ( N )
b

where:
T N = time for the Nth time
T 1 = hours to produce the first unit
log of the learning rate
b= = slope of the learning
log 2
curve

Some of the values for b

Learning-Curve Coefficient Approach

 embodied in Table E.3

T N =T 1 C
where:
T N = number of labor-hours required to produce the Nth unit
T 1 = number of labor-hours required to produce the first unit
C = learning-curve coefficient found in Table E.3
Example 2: Using learning-curve coefficients
The learning-curve coefficient, C, depends on both the learning rate (70%, 75%, 80%, and so on) and the unit of interest.

It took a Korean shipyard 125,000 labor-hours to produce the first of several tugboats that you expect to purchase for your
shipping company, Great Lakes, Inc. Boats 2 and 3 have been produced by the Koreans with a learning factor of 85%. At
$40 per hour, what should you, as purchasing agent, expect to pay for the fourth unit?

T N =T 1 C
T 4= (125,000 hours ) (.723)  fourth unit and a learning factor of 85% in the table
T 4=90,375 hours
To find the cost, multiply by $40:

90 , 375 hours x $ 40 per hour =$ 3,615,000

Example 3: Using cumulative coefficients
Table E.3 also shows cumulative values. These allow us
to compute the total number of hours needed to
complete a specified number of units. Just multiply the
table value times the time required for the first unit.

Preceding example computed the time to complete the

fourth tugboat that Great Lakes plans to buy. How long
will all four boats require?

T N =T 1 C
T 4= (125,000 hours ) (3.345)  “total time” in Table Note: both the vertical and horizontal axes of this figure are log
E.3 scales. This is known as lo-log graph
T 4=418,125hours in total for all 4 boats Lower costs are not automatic; they must be managed
down. When a firm’s strategy is to pursue a curve
Using Table E.3 requires that we know how long it takes steeper than the industry average (the company cost
to complete the first unit. Yet, what happens if our most line in Figure 2) it does by
recent or most reliable information available pertains to
some other unit? The answer is that we must use these 1. Following an aggressive pricing policy
data to find a revised estimate for the first unit and then 2. Focusing on continuing cost reduction and
apply the table to that number. productivity improvement.
3. Building on shared experience.
Example 4: Revising learning-curve estimates
4. Keeping capacity growing ahead of demand.
Great Lakes, Inc., believes that unusual circumstances
in producing the first boat imply that the time estimate of Costs may drop as a firm pursues the learning curve, but
125,000 hours is not as valid a base as the time required volume must increase for the learning curve to exist.
to produce the third boat. Boat number 3 was completed Moreover, managers, must understand competitors
in 100,000 hours. before embarking on a learning-curve strategy.
To solve for the revised estimate for boat number 1, we Weak competitors are undercapitalized, stuck with high
return to Table E.3, with a unit value N = 3 and a costs, do not understand the logic of learning curves.
learning-curve coefficient of C=.733 in the 85% column.
However, strong and dangerous competitors control
100,000 their costs, have solid financial positions for the large
=129,366 hours
.733 investments needed, and have s track record of using an
aggressive learning-curve strategy. Taking on such a
So 129,366 is the new (revised) estimate for boat 1. competitor in a price war may help only the consumer.
Strategic Implications of Learning Curves Applications of the learning curve:
When the rate of change is constant, a log-log graph 1. Internal – determine labor standards and rates of
yields a straight line. If an organization believes its cost material supply required
line to be the “company cost” line, and the industry price 2. External – determine purchase costs
is indicated by the dashed horizontal line, then the 3. Strategic – determine volume-cost changes
company must have costs at the point below the dotted
line (for example, point a or b) or else operate at a loss Limitations of Learning Curves
(point c).
Before using learning curves, some cautions are in order:
Industry learning curve for price compared with company
 Because learning curves differ from company to company,
learning curve for cost
as well as industry to industry, estimates for each
organization should be developed rather than applying
someone else’s.
 Learning curves are often based on the time necessary to
complete the early units; therefore, those times must be
accurate. As current information becomes available,
reevaluation is appropriate.
 Any changes in personnel, design, or procedure can be
expected to alter the learning curve, causing the curve to
spike up for a short time, even if it is going to drop in the
long run.
 While workers and process may improve, the same
learning curves do not always apply to indirect labor and
material.
 The culture of the workplace, as well as resource
availability and changes in the process, may alter the
learning curve. For instance, as a project nears its end,
worker interest and effort may drop, curtailing progress
down the curve.