Slide 1 Mass Customization and the Learning Curve Appendix 9A Mass customization is the new trend of making products partially mass produced, and partially customized. Land’s End sells mass produced clothing in catalogs and in stores such as Sears, but it also offers the service of stitching initials or names in shirts or duffle bags – this makes the product at the same time mass produced and customized. Economies offered in the mass production of items helps to offset the expense of individually designed products.  South-Western Publishing

Slide 2 Learning Curve Relationship “Learning by doing" has wide application in production processes. Workers and management become more efficient with experience. The cost of production declines as the accumulated past production, Q =  q t, increases, where q t is the amount produced in the tth period, and Q is the accumulated past production. Airline manufacturing, ship building, and appliance manufacturing have demonstrated the learning curve effect.

Slide 3 Functionally, the learning curve relationship can be written C = a·Q b, where C is the input cost of the Qth unit: Taking the (natural) logarithm of both sides, we get: log C = log a + b·log Q The coefficient b tells us the extent of the learning curve effect. »If the b = 0, then costs are at a constant level. » If b > 0, then costs rise in output, which is exactly opposite of the learning curve effect. »If b < 0, then costs decline in output, as predicted by the learning curve effect.

Slide 4 Example Cookie Baskets, Inc., is a local firm that assembles gift baskets. This is a one-owner, one-worker firm. Using data on time it takes to make the tenth, twentieth, and so forth baskets, the manager estimates the following regression. Ln T = QR 2 =.834 N = 30 (3.1) (2.6) where T is time it took to make a basket and Q is the accumulated number of baskets made, and the parentheses contain t-statistics. Q:Is this firm finding any benefits of Learning by Doing? A:Yes, the coefficient on Q is negative, so it takes less time to make baskets as the number of baskets made grows. The coefficient is statistically significant.

Slide 5 Percentage of Learning The proportion by which costs are reduced through DOUBLING output is estimated as follows: L = (C 2 /C 1 )·100% »where C 1 is the input or cost for the Q 1 unit of output and C 2 is the input or cost for the Q 2 unit of output (and Q 2 = 2Q 1 ). If the percentage of learning, L = 82%, then input costs decline 18% as output doubles. »The percentage of learning is 100% - L. When L = 100%, there is no percentage of learning.