7/29/2019 Learning Curves Chap9 App9A

1/5

Slide 1

Mass Customizationand the Learning Curve

Appendix 9A

Mass customization is the new trend of making products

partially mass produced, and partially customized.

Lands 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 bagsthis 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.

2008 Thomson * South-Western

7/29/2019 Learning Curves Chap9 App9A

2/5

Slide 2

Learning Curve Relationship

Learning by doing" has wide application inproduction processes.

Workers and management become more efficient

with experience.

The cost of production declines as the accumulated

past production,Q = qt, increases, where qt is theamount 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.

7/29/2019 Learning Curves Chap9 App9A

3/5

Slide 3

Functionally, the learning curve relationship can

be written C = aQb, where C is the input cost ofthe Qth unit:

Taking the (natural) logarithm of both sides, we

get: log C = log a + blog Q The coefficient b tells us the extent of the

learning curve effect.

If theb = 0, then costs are at a constant level.

Ifb > 0, then costs rise in output, which is exactly

opposite of the learning curve effect.

Ifb < 0, then costs decline in output, as predicted by

the learning curve effect.

7/29/2019 Learning Curves Chap9 App9A

4/5

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 on accumulated number of

baskets, the manager estimates the following regression.

Ln T = .4 - .02

LnQ R2 = .834 N = 30(3.1) (2.6)

where T is time it took to make a basket and Qis the

accumulated number of baskets made, and the parentheses

contain t-statistics.Q: Is this firm finding any benefits ofLearning 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 as the estimated t-value is 2.6..

7/29/2019 Learning Curves Chap9 App9A

5/5

Slide 5

Percentage of Learning

The proportion by which costs are reducedthrough DOUBLING output is estimated asfollows:

L = (C2/C1)100% where C1 is the input or cost for the Q1 unit of output

and C2 is the input or cost for the Q2 unit of output(and Q2 = 2Q1).

If the percentage of learning, L = 82%, then inputcosts decline 18% as output doubles.

Thepercentage of learningis 100% - L.

When L = 100%, there is no percentage of learning.