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The document discusses the learning curve concept in project management, emphasizing its importance in competitive bidding and cost estimation across various industries. It explains how experience curves indicate that manufacturing efficiency improves with repeated production, leading to significant time and cost savings. Additionally, it outlines the limitations of learning curves, such as their diminishing returns over time and the challenges in data availability for accurate construction.

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Perlie Serrano
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2 views

Project_Management_Lesson_18.pptx

The document discusses the learning curve concept in project management, emphasizing its importance in competitive bidding and cost estimation across various industries. It explains how experience curves indicate that manufacturing efficiency improves with repeated production, leading to significant time and cost savings. Additionally, it outlines the limitations of learning curves, such as their diminishing returns over time and the challenges in data availability for accurate construction.

Uploaded by

Perlie Serrano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Project

Management
OM202
Lesson 18

The Learning Curve

2
LEARNING CURVE
Competitive bidding has become an integral part of the
project management responsibility in many industries.
A multitude of estimating techniques are available in
such fields as construction, aerospace, and defense to
assist project managers in arriving at a competitive bid.
If the final bid is too high, the company may not be
competitive. If the bid is too low, the company may
have to incur the cost of the overrun out of its own
pocket. For a small firm, this overrun could lead to
financial disaster.
3
The Theory of Learning Curve

Experience curves are based on the old adage that practice


makes perfect. A product can always be manufactured
better and in a shorter time period not only the second
time, but each succeeding time. This concept is highly
applicable to labor-intensive projects, such as those in
manufacturing where labor forecasting has been a tedious
and time-consuming effort

4
Today’s executives often measure the profitability of a
corporation as a function of market share. As market share
increases, profitability will increase, more because of lower
production costs than increased margins. This is the
experience curve effect. Large market shares allow
companies to build large manufacturing plants so that the
fixed capital costs are spread over more units, thus
lowering the unit cost. This increase in efficiency is referred
to as economies of scale and may be the main reason why
large manufacturing organizations may be more efficient
than smaller ones

5
The Learning Curve Concept

Experience curves are based on the old adage that practice


makes perfect. A product can always be manufactured
better and in a shorter time period not only the second
time, but each succeeding time. This concept is highly
applicable to labor-intensive projects, such as those in
manufacturing where labor forecasting has been a tedious
and time-consuming effort

6
Learning curves stipulate that
manufacturing man-hours (specifically
direct labor) will decline each time a
company doubles its output. Typically,
learning curves produce a cost and time
savings of 10 to 30 percent each time a
company’s experience at producing a
product doubles.

7
As an example, consider the data shown in the
table, which represents a company operating on a
75 percent learning curve. The time for the second
unit is 75 percent of the time of the first unit. The
time for the fortieth unit is 75 percent of the time
for the twentieth unit. The time for the 800th unit
is 75 percent of the time for the 400th unit.
Likewise, we can forecast the time for the 1,000th
unit as being 75 percent of the time for the 500th
unit. In this example, the time decreased by a
fixed amount of 25 percent. Theoretically, this
decrease could occur indefinitely.

8
9
What does the learning curve tells in management?

● The time required to perform a task


decreases as the task is repeated.
● The amount of improvement decreases as
more units are produced.
● The rate of improvement has sufficient
consistency to allow its use as a prediction
tool.

10
GRAPHIC REPRESENTATION
From the table presented earlier, here is a
graphical representation of what is actually
happening:

11
KEYWORDS ASSOCIATED
WITH LEARNING CURVES

● Slope of the curve. A percentage figure that represents


the steepness (constant rate of improvement) of the curve.
Using the unit curve theory, this percentage represents the
value (e.g., hours or cost) at a doubled production quantity
in relation to the previous quantity. For example, with an
experience curve having 80 percent slope, the value of unit
two is 80 percent of the value of unit one, the value of unit
four is 80 percent of the value at unit two, the value at
unit 1000 is 80 percent of the value of unit 500, and so
on.
● Unit one. The first unit of product actually completed
during a production run. This is not to be confused with a
unit produced in any reproduction phase of the overall 12
acquisition program.
KEYWORDS ASSOCIATED
WITH LEARNING CURVES

● Unit one. The first unit of product actually


completed during a production run. This is not to
be confused with a unit produced in any
reproduction phase of the overall acquisition
program.
● Cumulative average hours. The average hours
expended per unit for all units produced through
any given unit. When illustrated on a graph by a
line drawn through each successive unit, the
values form a cumulative average curve.
13
KEYWORDS ASSOCIATED
WITH LEARNING CURVES

● Unit hours. The total direct labor hours


expended to complete any specific unit. When a
line is drawn on a graph through the values for
each successive unit, the values form a unit
curve.
● Cumulative total hours. The total hours
expended for all units produced through any
given unit. The data plotted on a graph with
each point connected by a line form a
cumulative total curve. 14
The greatest benefit of learning curves
lies in the story they tell when plotted
on paper

15
THE CUMULATIVE
AVERAGE CURVE
It is common practice to plot the learning curve on log-log
paper but to calculate the cumulative average from the
following formula:

Where:
Tx = the direct labor hours for unit n
T1 = the direct labor hours for the first unit (unit one)
X = the cumulative unit produced
-K = a factor derived from the slope of the experience curve
16
THE CUMULATIVE
AVERAGE CURVE

17
Example:

As an example, consider a situation where the first unit


requires 812 hours and the company is performing on a 75
percent learning curve. The man-hours required for the
250th unit would be:

18
SOURCES OF EXPERIENCE

• Labor efficiency
• Work specialization and methods improvements
• New production process
• Getting better performance from production equipment
• Changes in the resources mix
• Product standardization
• Product redesign
• Incentives and disincentives

19
UNIT COSTS AND MIDPOINTS

The use of the learning curve is dependent on the


methods of recording costs that companies employ. An
accounting or statistical record system must be devised
by a company so that data are available for learning
curve purposes. Otherwise, it may be impossible to
construct a learning curve. Costs, such as labor hours
per unit or dollars per unit, must be identified with the
unit of product. It is preferable to use labor hours
rather than dollars, because the latter contain an
additional variable—the effect of inflation or deflation
(both wage-rate and material cost changes)—that the
former does not contain.
20
LEARNING CURVE LIMITATIONS

● The learning curve does not continue forever. The


percentage decline in hours/dollars diminishes over
time.
● The learning curve knowledge gained on one product
may not be extendable to other products unless there
exist shared experiences.
● Cost data may not be readily available in order to
construct a meaningful learning curve. Other problems
can occur if overhead costs are included with the direct
labor cost, or if the accounting codes cannot separate
work packages sufficiently in order to identify those
elements that truly demonstrate experience effects.
21
LEARNING CURVE LIMITATIONS

● Quantity discounts can distort the costs and the


perceived benefits of learning
curves.
● Inflation must be expressed in constant dollars.
Otherwise, the gains realized from experience may be
neutralized.
● Learning curves are most useful on long-term
horizons (i.e., years). On short-term horizons, benefits
perceived may not be the result of learning curves.

22
LEARNING CURVE LIMITATIONS

● External influences, such as limitations on materials,


patents, or even government regulations, can restrict
the benefits of learning curves.
● Constant annual production (i.e., no growth) may
have a limiting experience effect after a few years.

23

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