General Theory

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.

It wasn't until the 1960s that the true implications of experience curves became evident. Personnel from the Boston Consulting Group showed that each time cumulative production doubled, the total manufacturing time and cost fell by a constant and predictable amount. Furthermore, the Boston Consulting Group showed that this effect extended to a variety of industries such as chemicals, metals, and electronic components.

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.

Capital equipment costs follow the rule of six-tenths power of capacity. As an example, consider a plant that has the capacity of producing 35,000 units each year. The plant's construction cost was $10 million. If the company wishes to build a new plant with a capacity of 70,000 units, what will the construction cost be?

Solving for $ new, we find that the new plant will cost approximately $15 million, or one and one-half times the cost of the old plant. (For a more accurate determination, the costs must be adjusted for inflation.)

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. As an example, consider the data shown in Table 18-1, 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.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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