A productive workplace aims to maximize its available resources and manage its operational costs to yield the highest output possible. One of the ways to achieve this is by adopting a previously successful system and replicating it massively. The experience curve epitomizes this type of strategy. It is a system that ultimately helps businesses cut costs and increase their output through consistent practice. This article discusses the experience curve and the roles it plays in the productive workplace.
What is it?
The experience curve is a concept that defines the relationship between a company's cumulative production yield and its production cost. It asserts that a company can lower its production costs by reproducing a previously successful process to produce an output in large amounts. It is premised on the notion that the more a company produces a particular product, the lower the production cost and the more efficient it is in the production process.
Cn = C1 * X^-a
Where:
Cn = the cost of producing the n-th production unit
C1 = the cost of the first production unit
X = the cumulative volume of production
a = the elasticity of cost with regard to output
When plotted on a graph, the experience curve shows that a company's unit cost of production decreases at a constant rate as it increases its cumulative production volume. The cumulative production volume is plotted on the graph's x-axis, while the unit cost of production is plotted on the y-axis.
When do we use it?
The experience curve provides value in the following situations.
When a company needs to cater to an increasing customer base, it provides the framework for the company to step up production and meet its increased output quota.
When the company looks to evaluate its performance over a period, this is so that it can ramp up its operations after being convinced of previous successes.
It can help companies increase their profit margins on the back of increased productivity. It encourages mass-scale operations that can cut costs and increase output, resulting in an overall improved net profit.
When it is no longer practicable to sustain the unit cost of production.
When a company seeks to establish a routine operational direction or strategy, it helps businesses identify efficient processes so they can adopt them long-term.
What business questions is it helping us to answer?
The experience curve helps to answer the following questions:
What is the relationship between a company's cumulative production quantity and its overall production cost? How can this relationship be exploited and converted to yield significant gains for the company?
What can be done to cut operational costs? How can the company's efforts be directed toward providing cost-cutting measures in a productive work environment?
What can be done to facilitate increased profit and enhance productivity? How can a company maximize its available resources to produce maximum output and make the most gain?
How will standardization and specialization impact the productive workplace? What techniques, unique processes, and operations have proven successful over time and can be replicated in multifold?
How can workplace efficiency in the management of human and material resources, processes, and technologies be facilitated?
How do we use it?
The experience curve suggests that the more times you do anything in particular, the more proficient and comfortable you are at doing it and the more profitable it is. Using its mathematical formula, Cn = C1 * X^-a, as previously described, you can reduce the unit cost of producing an item by producing it in bulk. By increasing the production volume, you can cut down the overall production cost by a significant percentage. This percentage increase represents the time and material resources spent in production and the quantity produced.
Below is a list of the actions you must take to use this formula effectively.
Specify your output's unit. Define it in measurable terms if tangible and in qualitative terms if not.
Define your cost allocation. Set aside the monies budgeted to realize your production targets.
Establish your target timeframe. Set a time threshold around which you expect to have achieved your production target.
Specify your target. Set a target bar that you must scale in terms of the product yield realized or the efficiency of the process attained.
Start measuring performance. The data you collect from measuring your performance over the aforementioned performance metrics will form your strategy going forward.
Practical Example
A lithium-ion battery manufacturing company seeks to use the experience curve in mapping out its production strategy. It currently produces 500 units per month at an average cost of 10$ per unit and aims to double this output in its next monthly production cycle.
Using the experience curve, its savings in cost per unit as a result of its increased cumulative production will approach the double-digit mark in a month. And while at it, it can become more experienced in producing more high-quality and defect-free versions of these batteries.
Advantages
It provides a cost management tool for businesses looking to reduce production costs.
It encourages mass production and improved output. Its focus on large-scale production helps facilitate increased profit.
It can also provide a performance evaluation tool for businesses looking to measure their productivity.
It does not require technical input or additional value service to be undertaken. It only relies on the proof that a process is proven successful to replicate it en masse.
It facilitates a culture of continuity, consistent learning, process improvement, and progress monitoring in work environments.
Disadvantages
The experience curve relies on a number of parameters, such as time, number, and quality of previous experiences. However, failing to track any of these parameters may lead to unreliable data collection.
Tracking and measuring the performance or progress of certain operations or experiences may prove difficult. This is more so if the output is not specific as with a sale, service, or a defined product.
The experience curve does not necessarily provide any guarantees that a proven process will continue to perform satisfactorily in perpetuity. This is because human factors and other external factors can affect efficiency over time.
It may result in complacency on the part of market leaders and managers. They may become reluctant to innovate or try something different.
The experience curve is more suited to a production-based system than a service-based one. It relies on numbers and mass production and may not prove useful otherwise.
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