Learning Curve Analysis Supplement I Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 01

The Learning Effect Organizational learning – The process of gaining experience with products and processes, achieving greater efficiency through automation and other capital investments, and making other improvements in administrative methods or personnel. Learning curve – A line that displays the relationship between processing time and the cumulative quantity of a product or service produced. I - 02Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

The Learning Effect Background – First developed in aircraft industry – Rate of learning may be different for different products and different companies Learning curves and competitive strategy – Project the manufacturing cost per unit – Product design changes disrupt the learning effect – Costs decrease as products move down the learning curve Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 03

Learning curve Standard time Learning period 0.30 – 0.25 – 0.20 – 0.15 – 0.10 – 0.05 – 0 – |||||| Cumulative units produced Process time per unit (hr) Learning Curve Copyright ©2013 Pearson Education, Inc. publishing as Prentice HallI- 04

Developing Learning Curves In developing learning curves we make the following assumptions: – The direct labor required to produce the n + 1 st unit will always be less than the direct time of labor required for the n th unit. – Direct labor requirements will decrease at a declining rate as cumulative production increases. – The reduction in time will follow an exponential curve. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 05

Developing Learning Curves Using a logarithmic model to draw a learning curve, the direct labor required for the n th unit, k n, is k n = k 1 n b where k 1 =direct labor hours for the first unit n =cumulative numbers of units produced r =learning rate (as decimal) Doubling of the quantity reduces the time per unit by (1 – r ) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 06

Developing Learning Curves CONVERSION FACTORS FOR THE CUMULATIVE AVERAGE NUMBER OF DIRECT LABOR HOURS PER UNIT 80% Learning Rate (n = cumulative production) nnn Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 07

Developing Learning Curves CONVERSION FACTORS FOR THE CUMULATIVE AVERAGE NUMBER OF DIRECT LABOR HOURS PER UNIT 90% Learning Rate (n = cumulative production) nnn Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 08

Example I.1 A manufacturer of diesel locomotives needs 50,000 hours to produce the first unit. Based on past experience with similar products, you know that the rate of learning is 80 percent. a.Use the logarithmic model to estimate the direct labor required for the 40th diesel locomotive and the cumulative average number of labor hours per unit for the first 40 units. b.Draw a learning curve for this situation. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 09

Example I.1 a.The estimated number of direct labor hours required to produce the 40th unit is k 40 = 50,000(40) (log 0.8)/(log 2) = 50,000(40) –0.322 = 50,000( ) = 15,244 hours We calculate the cumulative average number of direct labor hours per unit for the first 40 units with the help of Table I.1. For a cumulative production of 40 units and an 80 percent learning rate, the factor is The cumulative average direct labor hours per unit is 50,000( ) = 21,492 hours. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 10

Example I.1 b.Plot the first point at (1, 50,000). The second unit‘s labor time is 80 percent of the first, so multiply 50,000(0.80) = 40,000 hours. Plot the second point at (2, 40,000). The fourth is 80 percent of the second, so multiply 40,000(0.80) = 32,000 hours. Plot the point (4, 32,000). 50 – 40 – 30 – 20 – 10 – 0 – ||||||| Cumulative units produced Direct labor hours per locomotive (thousands) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 11

Application I.1 The first unit of a new product is expected to take 1000 hours to complete. If the rate of learning is 80 percent, how much time should the 50th unit take? Given k 1 = 1,000 n = 50 r = 0.80 k n = k 1 n b k 50 = 1000(50) (log 0.8/log 2) = 1000(50) – = 1000( ) k 50 = hours Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 12 The 50th unit will take 284 hours

Bid preparation – Use learning curves to estimate labor cost – Add materials costs and desired profit to obtain total bid amount Financial planning – Use learning curves to estimate cash needed to finance operations Estimating cumulative labor requirements, such as for training requirements and hiring plans – Based on doublings, given rate of learning – Based on conversion factors tables Using Learning Curves Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 13

Example I.2 The manager of a custom manufacturer has just received a production schedule for an order for 30 large turbines. Over the next 5 months, the company is to produce 2, 3, 5, 8, and 12 turbines, respectively. The first unit took 30,000 direct labor hours, and experience on past projects indicates that a 90 percent learning curve is appropriate; therefore, the second unit will require only 27,000 hours. Each employee works an average of 150 hours per month. Estimate the total number of full-time employees needed each month for the next 5 months. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 14

Example I.2 The following table shows the production schedule and cumulative number of units scheduled for production through each month: MonthUnits per MonthCumulative Units Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 15

Example I.2 We first need to find the cumulative average time per unit using Table I.1 and the cumulative total hours through each month. We then can determine the number of labor hours needed each month. The calculations for months 1 – 5 follow. Month Cumulative Average Time per Unit Cumulative Total Hours for All Units 130,000( ) = 28,500.0 (2)28,500.0 = 57, ,000( ) = 26,035.2(5)26,035.2 = 130, ,000( ) = 23,983.5(10)23,983.5 = 239, ,000( ) = 22,224.0 (18)22,224.0 = 400, ,000( ) = 20,727.0 (30)20,727.0 = 621,810 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 16

Example I.2 Calculate the number of hours needed for a particular month by subtracting its cumulative total hours from that of the previous month. Month 1: Month 2: Month 3: Month 4: Month 5: 57,000 – 0 = 57,000 hours 130,176 – 57,000 = 73,176 hours 239,835 – 130,176 = 109,659 hours 400,032 – 239,835 = 160,197 hours 621,810 – 400,032 = 221,778 hours Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 17

Example I.2 The required number of employees equals the number of hours needed each month divided by 150, the number of hours each employee can work. Month 1: Month 2: Month 3: Month 4: Month 5: 57,000/150 = 380 employees 73,176/150 = 488 employees 109,659/150 = 731 employees 160,197/150 = 1,068 employees 221,778/150 = 1,479 employees Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 18

Application I.2 A company has a contract to make a product for the first time. The total budget for the 38-unit job is 15,000 hours. The first unit took 1000 hours, and the rate of learning is expected to be 80 percent. a.Do you think the 38-unit job can be completed within the 15,000-hour budget? b.How many additional hours would you need for a second job of 26 additional units? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 19

Application I.2 a. Average 38 = Total 38 = b. They will have trouble meeting the 15,000 hour budget Average 64 = Total 64 = Total 64 – Total 38 = = 1000( )= (38)= 16,581 hours 1000( )= (64)= 23,924 hours 23,924 – 16,581 7,343 additional hours required Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 20

Managerial Considerations Good estimates of the learning rate may be difficult to obtain. The simpler the service or product, the less the learning rate. The entire learning curve is based on the time required for the first unit. Learning curves are used to greatest advantage in the early stages of new product or service production. Implementing a team approach can change organizational learning rates. Learning curves are only approximations. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 21

Solved Problem The Minnesota Coach Company has just been given the following production schedule for ski-lift gondola cars. This product is considerably different from any others the company has produced. Historically, the company‘s learning rate has been 80 percent on large projects. The first unit took 1,000 hours to produce. MonthUnitsCumulative Units Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 22

Solved Problem a.Estimate how many hours would be required to complete the 38th unit. b.If the budget only provides for a maximum of 30 direct labor employees in any month and a total of 15,000 direct labor hours for the entire schedule, will the budget be adequate? Assume that each direct labor employee is productive for 150 work hours each month. a.We use the learning curve formulas to calculate the time required for the 38th unit: (1,000 hours)(38) –0.322 = 310 hourskn = k1nb =kn = k1nb = Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 23

( hr/u)(3 u) = 2,502.1 hr 1,000( ) = hr/u 1,000( ) = hr/u( hr/u)(10 u) = 6,315.4 hr 1,000( ) = hr/u( hr/u)(20 u) = 10,485.0 hr 1,000( ) = hr/u( hr/u)(32 u) = 14,678.7 hr 1,000( ) = hr/u( hr/u)(36 u) = 15,958.4 hr 1,000( ) = hr/u( hr/u)(38 u) = 16,580.9 hr Solved Problem b. Table I.1 gives the data needed to calculate the cumulative number of hours through each month of the schedule. Table I.2 shows these calculations. CUMULATIVE TOTAL HOURS Month Cumulative Units Cumulative Average Time per Unit Cumulative Total Hours for All Units Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 24

(2,502.1 hr)/(150 hr) =16.7, or17 2,502.1 –0 = 2,502.1 hr 6,315.4 –2,502.1 = 3,813.3 hr(3,813.3 hr)/(150 hr) =25.4, or26 10,485.0 –6,315.4 = 4,169.6 hr(4,169.6 hr)/(150 hr) =27.8, or28 14,678.7 –10,485.0 =4,193.7 hr(4,193.7 hr)/(150 hr) =27.9, or28 15,958.4 –14,678.7 =1,279.7 hr(1,279.7 hr)/(150 hr) =8.5, or9 16,580.9 –15,958.4 =622.5 hr(622.5 hr)/(150 hr) =4.2, or5 Solved Problem The cumulative amount of time needed to produce the entire schedule of 38 units is 16,580.9 hours, which exceeds the 15,000 hours budgeted. By finding how much the cumulative total hours increased each month, we can break the total hours into monthly requirements. Finally, the number of employees required is simply the monthly hours divided by 150 hours per employee per month. DIRECT LABOR EMPLOYEES MonthCumulative Total Hours for MonthDirect Labor Workers by Month Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 25

Solved Problem The schedule is feasible in terms of the maximum direct labor required in any month because it never exceeds 28 employees. However, the total cumulative hours are 16,581, which exceeds the budgeted amount by 1,581 hours. Therefore, the budget will not be adequate. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall I - 26

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