9.11 Some Interesting Points

Point 1: Some people try to apply a standard learning curve (e.g. 85 percent for aerospace) without doing the analysis. And others try to assign an arbitrary number to a learning curve for purposes of negotiations or to make the cost match the budget. Learning curves are not driven by what the financial people want to see. They are driven by:

• The inherent factory floor and 5Ms (manpower, machines, material, methods and measurements) that is being used or will be used to produce the product;
• By the design of the item being produced and how "producible" or "unproducible" the design is; and
• By technology.

Thus an aerospace firm that has a product with a lot of touch labor will probably have a lower learning curve that one with a product that does not have much touch labor.

Point 2: Do not mix products technologies and learning curves and come up with a composite curve (Figure 9-22). For example, a factory producing three different products, one is very labor intensive, another is driven by material or subcontractor costs, and a third may use different technologies. Each of these has their own learning curve and associated costs (see discussion on activity based cost accounting). Assigning the same learning curve to each may make one look profitable when in fact it is losing the company money.

Point 3: The cost of "unit 1" or the first unit is the baseline cost and future cost come off of this unit. Thus it is important to establish "affordability" up front and early. Many people make the mistake of trying to force the cost to meet the budget under the guise of DTC or CAIV and then plan on achieving cost goals at "unit 100." This is in itself not a bad approach, but if you do nothing to drive down the cost of unit 1 from the very beginning, then you probably will have no chance of achieving your DTC or other cost/affordability goals. Producibility engineering, for example, is a key determinant of affordability. Yet producibility engineering is often one of the first things program managers trade-off to achieve early budget constraints. Money for manufacturing improvements to help reduce quality related defects and costs or to improve efficiencies often comes in two forms, late and never.

Figure 9-19 Learning Curve Analysis

Point 4: Using Figure 9-19, which of the two learning curve gives you the better cost, Product A or B? Product A starts off (unit 1) at a lower cost, but has a shallower learning curve. Product B starts off at a higher cost, but has a steeper curve. If you are trying to determine the cost of production, look at the area under the curve and then compare the two areas as that will give you the cost. The classic DAU answer, "it depends," is appropriate here. Product A is the cheaper product if you are only going to by a few units (less than 8), but if you are buying more than eight units, then Product B is cheaper. The lesson here is not to go by just the learning curve slope in making a decision.