Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Welcome to Production Costs and Quality On average, production accounts for about one third of the total life cycle cost of a system. That is about three times the amount typically spent on research and development. When production problems occur, they affect the program at an exponential rate. Problems during this phase are seldom resolved quickly or cheaply. In this lesson, you will learn about some ways to minimize production costs as a program transitions from development to deployment. You will also learn about the Learning Curve, which impacts production costs in a positive way.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Lesson Objectives Upon completion of this topic, you should be able to: Recognize the impact of manufacturing on cost, schedule, and performance Recognize the value of the cost of quality Identify where and when learning curve theory is applied

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Production Cost and Quality The government Program Manager (PM) needs to be aware of the processes used by the contractor to produce the system. The PM is concerned about ensuring the quality of the end product and controlling the cost of production, which is invariably passed on to the customer. Each of five elements (5Ms) of manufacturing--manpower, machinery, material, methods, and measurement—contribute to the quality and cost of the end product. The cost of producing a quality product will vary depending upon how that quality is achieved. In previous lessons, we discussed the importance of having a producible design and reducing variability. By putting processes in place to prevent problems in the first place, less money and time will be spent on correcting and reworking the failures. However, some problems are bound to occur, even with proper planning and sound management. Consistent quality requires vigilance and occasional intervention.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Cost of Quality 15% 35% 50% Prevention – avoiding problems in the first place, such as using process proofing. Ideally, prevention should make up about 50% of the cost of achieving quality. Appraisal – looking for errors through testing and inspection. Appraisal costs should make up about 35% of the cot of achieving quality. Failure Correction – fixing errors, often in the form of rework or repair. Correcting failures should only account for about 15% of the total cost of achieving quality. The cost of achieving quality can be spread across three approaches: Note: The percentages shown here are based on experience with newly developed, relatively low-volume systems.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Knowledge Review In the first production run of an Unmanned Air Vehicle (UAV), the costs for achieving quality products were spread as follows: Prevention 40% Appraisal 35% Correcting failures 25% Which one of these approaches is consistent with the recommended proportion for producing a quality product? A.Prevention B.Appraisal C.Correcting failures

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Learning Curve Theory Producing quality products is not the only way to reduce production costs. There is a phenomenon known as learning curve that works to bring down the costs of producing items over time. It’s based on the fact that production costs tend to go down as the quantity produced goes up. Learning curve theory assumes that as the production of an item doubles, the hours needed to produce that item decreases at a fixed rate. The more items that we produce, the less it should cost per item, as workers become more experienced and efficient. By applying learning curve theory, we can better estimate the cost of producing various quantities of an item. This information can be useful in planning the program as well as during actual production. Let’s look at an example.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Learning Curve - Example In the example below, the labor cost of producing the first 8 units is shown on the chart. As you can see, the cost per unit decreases over time. The labor cost of producing the first unit is $1,000. The cost to produce the second unit—a doubling of production quantity—is $800. That is a 20% reduction, or an 80% learning curve for producing this item. ($1,000 – $800 = $200, which is 20% of $1,000.) As the quantity doubles again (from 2 to 4 production units), the recurring unit labor cost decreases by $160. ($800 - $640 = $160, which is a 20% decrease from $800, the cost of the second unit.)

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Learning Curve Example (continued) Based on learning curve theory, we can predict the recurring labor cost for producing the eighth unit. As the quantity doubles again (from 4 to 8 production units), the recurring unit labor cost will decrease by another 20%..20 x $640 = $128 $640 - $128 = $512 $512 is 20% less than $640, the cost of the fourth unit.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Knowledge Review A TSA Systems Engineer is estimating how much is would cost to assemble new baggage screening devices for airport security. Applying an 80% learning curve, if assembling one device costs $2000, what would be the assembly cost per unit for the 4 th device? A.$1900 B.$1600 C.$1400 D.$1280

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Learning Curve Slope The steeper the learning curve, the greater its impact. The flatter the learning curve, the less the impact. Here is a 90% (flatter) learning curve, meaning that the improvement to produce the next doubled quantity is only a decrease of 10%. Declining unit costs are a result of workers becoming more familiar with their tasks and making process improvements based on their experience. The longer the workers have been on the job, the better they know their work and the faster they produce.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Learning Curve Conditions Learning curve theory does not apply in all production situations. The theory is most applicable in situations where the following conditions exist: Uninterrupted serial production – The manufacturing process is continuous without breaks for material, manufacturing changes, financial challenges or requirement changes Consistent product design – The design is stable permitting workers to gain more and more experience in assembly of singular items Management emphasis on productivity improvement – Upper and mid-level managers must show interest and support for improvements

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Learning Curve Influence Factors Factors that influence the learning curve include: Item complexity – The more complex an item is, the steeper the learning curve will be. This is because there are more opportunities for workers to learn and to improve the production process. Manufacturing methods and processes – The more automation involved in a production process, the flatter the learning curve will be. Workforce stability – The higher the turnover rate of the workforce, the flatter the learning curve will be. Production breaks – If there is a break in production, there may be a lack of experienced veterans to train new workers on the job, resulting in a flatter learning curve, at least initially.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Knowledge Review In which of the following programs would you expect to apply a steep learning curve to production labor costs? A.There is high turnover of factory personnel B.The design of the product is complex C.The production process is highly automated D.There are likely to be frequent breaks in the production process.

Intermediate Systems Acquisition Course Produce/Deploy/Support: Production Manufacturing Page X of Y Summary Production costs tend to be a significant portion of the life cycle cost of a program. All five elements of manufacturing (manpower, machinery, material, methods, measurement) contribute to the cost of production. It is not enough to combine the “5Ms” to produce a finished product; steps must be taken to ensure that products are free of defects. In general, about half of the costs of quality assurance should be directed towards prevention of problems. About one third of the costs should focus on looking for errors. Only fifteen per cent of quality assurance costs should be spent on correcting errors. The learning curve can lower manufacturing costs under certain conditions. The theory states that as production quantity doubles, the cost per unit decreases at a constant rate. Learning theory applies when the manufacturing process is uninterrupted and manpower intensive (rather than highly automated), the product design is complex and stable, personnel turnover is low, and management encourages workers to make process improvements. This knowledge is useful for projecting costs both before and after production begins. You may print this lesson or save it for future reference. Please select the next lesson from the table of contents to continue with the course.