Operations Management Module E Learning Curves Power Point

Operations Management Module E – Learning Curves Power. Point presentation to accompany Heizer/Render Principles of Operations Management, 7 e Operations Management, 9 e © 2008 Prentice Hall, Inc. E–

Outline þ Learning Curves in Services and Manufacturing þ Applying the Learning Curve þ Arithmetic Approach þ Logarithmic Approach þ Learning-Curve Coefficient Approach þ Strategic Implications of Learning Curves þ Limitations of Learning Curves © 2008 Prentice Hall, Inc. E– 2

Learning Objectives When you complete this module you should be able to: 1. 2. Define a learning curve Use the arithmetic concept to estimate times 3. Compute learning curve effects with the logarithmic and learningcurve coefficient approaches 4. Describe the strategic implications of learning curves © 2008 Prentice Hall, Inc. E– 3

Learning Curves þ Based on the premise that people and organizations become better at their tasks as the tasks are repeated þ Time to produce a unit decreases as more units are produced þ Learning curves typically follow a negative exponential distribution þ The rate of improvement decreases over time © 2008 Prentice Hall, Inc. E– 4

Cost/time per repetition Learning Curve Effect 0 Number of repetitions (volume) Figure E. 1 © 2008 Prentice Hall, Inc. E– 5

Learning Curves T x Ln = Time required for the nth unit where T = unit cost or unit time of the first unit L = learning curve rate n = number of times T is doubled First unit takes 10 labor-hours 70% learning curve is present Fourth unit will require doubling twice — 1 to 2 to 4 Hours required for unit 4 = 10 x (. 7)2 = 4. 9 hours © 2008 Prentice Hall, Inc. E– 6

Learning Curve Examples Example Model -T Ford production Aircraft assembly Equipment maintenance at GE Steel production Improving Parameters Price Direct labor-hours per unit Learning. Curve Cumulative Slope Parameter (%) Units produced 86 Units produced 80 Average time to Number of replace a group of replacements parts Production worker Units produced labor-hours per unit produced 76 79 Table E. 1 © 2008 Prentice Hall, Inc. E– 7

Learning Curve Examples Example Integrated circuits Handheld calculator Improving Parameters Average price per unit Average factory selling price Disk memory drives Heart transplants Learning. Curve Cumulative Slope Parameter (%) Units produced 72 Units produced 74 Average price per bit Number of bits 76 1 -year death rates Transplants completed 79 Table E. 1 © 2008 Prentice Hall, Inc. E– 8

Uses of Learning Curves Internal: labor forecasting, scheduling, establishing costs and budgets External: supply chain negotiations Strategic: evaluation of company and industry performance, including costs and pricing © 2008 Prentice Hall, Inc. E– 9

Arithmetic Approach þ þ Simplest approach Labor cost declines at a constant rate, the learning rate, as production doubles Nth Unit Produced Hours for Nth Unit 1 2 100. 0 80. 0 = (. 8 x 100) 4 64. 0 = (. 8 x 80) 8 16 © 2008 Prentice Hall, Inc. 51. 2 = (. 8 x 64) 41. 0 = (. 8 x 51. 2) E – 10

Logarithmic Approach Determine labor for any unit, TN , by T N = T 1 (N b ) where © 2008 Prentice Hall, Inc. TN= time for the Nth unit T 1 = hours to produce the first unit b = (log of the learning rate)/(log 2) = slope of the learning curve E – 11

Logarithmic Approach Determine labor for any unit, TN , by T N = T 1 (N b ) where Table E. 2 © 2008 Prentice Hall, Inc. Learning Rate (%) unit b TN= time for the T 1 = hours to produce 70 the first unit –. 515 b = (log of the learning rate)/(log 2) 75 curve –. 415 = slope of the learning 80 –. 322 Nth 85 –. 234 90 –. 152 E – 12

Logarithmic Example Learning rate = 80% First unit took 100 hours T N = T 1 (N b ) T 3 = (100 hours)(3 b) = (100)(3 log. 8/log 2) = (100)(3–. 322) = 70. 2 labor hours © 2008 Prentice Hall, Inc. E – 13

Coefficient Approach T N = T 1 C where © 2008 Prentice Hall, Inc. TN = 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 E – 14

Learning-Curve Coefficients Table E. 3 70% 85% Unit Number (N) Unit Time Total Time 1 1. 000 2 . 700 1. 700 . 850 1. 850 3 . 568 2. 268 . 773 2. 623 4 . 490 2. 758 . 723 3. 345 5 . 437 3. 195 . 686 4. 031 10 . 306 4. 932 . 583 7. 116 15 . 248 6. 274 . 530 9. 861 20 . 214 7. 407 . 495 12. 402 © 2008 Prentice Hall, Inc. E – 15

Coefficient Example First boat required 125, 000 hours Labor cost = $40/hour Learning factor = 85% T N = T 1 C T 4 = (125, 000 hours)(. 723) = 90, 375 hours for the 4 th boat 90, 375 hours x $40/hour = $3, 615, 000 T N = T 1 C T 4 = (125, 000 hours)(3. 345) = 418, 125 hours for all four boats © 2008 Prentice Hall, Inc. E – 16

Coefficient Example Third boat required 100, 000 hours Learning factor = 85% New estimate for the first boat 100, 000 = 129, 366 hours. 773 © 2008 Prentice Hall, Inc. E – 17

Strategic Implications To pursue a strategy of a steeper curve than the rest of the industry, a firm can: 1. Follow an aggressive pricing policy 2. Focus on continuing cost reduction and productivity improvement 3. Build on shared experience 4. Keep capacity ahead of demand © 2008 Prentice Hall, Inc. E – 18

Price per unit (log scale) Industry and Company Learning Curves Figure E. 2 © 2008 Prentice Hall, Inc. In du C st om ry pr pa ice ny co st (c ) Loss (b ) Gross profit margin (a ) Accumulated volume (log scale) E – 19

Limitations of Learning Curves þ Learning curves differ from company to company as well as industry to industry so estimates should be developed for each organization þ Learning curves are often based on time estimates which must be accurate and should be reevaluated when appropriate © 2008 Prentice Hall, Inc. E – 20

Limitations of Learning Curves þ Any changes in personnel, design, or procedure can be expected to alter the learning curve þ Learning curves do not always apply to indirect labor or material þ The culture of the workplace, resource availability, and changes in the process may alter the learning curve © 2008 Prentice Hall, Inc. E – 21