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W. Bentz EMBA 802 1

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• Comments on Prairie State Paper Co.

• Comments on Quiz 3

• Comments on ABKY 7-42

• The learning curve phenomena

• Comment on Quiz 4

W. Bentz EMBA 802 2

Prairie State Wrap-UpPrairie State Wrap-Up

For future reference:

• Some teams, but not all, did a better job of framing the question.

• Report the differential affect on costs as between the alternatives considered, or the range of differential costs, and your assumptions. The difference in unit costs is an inadequate description of the differential cost in most cases.

W. Bentz EMBA 802 3


• Include a discussion of the impact of changes in fixed costs on total differential costs, which might range from little effect in the immediate future to complete avoidance eventually.

W. Bentz EMBA 802 4


• Whenever considering the behavior of total cost, the relevant range qualification should always be considered. Theory tells us the direction of probable changes as one approaches the limits of activity even if we do not have precise estimates (i.e., added shut-down costs for the electricity generating activity, or reduced efficiency in the steam activity.

W. Bentz EMBA 802 5


• Many factors affect decisions. So I want you to consider all financial factors, even when the decision seems obvious. In Prairie State, the variable cost information seems sufficient to make the decision on the basis of lower costs, but the savings are small and the final decision might well be based on other factors.

W. Bentz EMBA 802 6

ABKY 7-42 Wrap-UpABKY 7-42 Wrap-Up

• The only constraint is the machine capacity in department one. Machine hours in general are not constrained, just in department one. Therefore, your formulation of the problem should be in terms of that single constraint. Any other formulation may lead you away from the correct product mix.

W. Bentz EMBA 802 7


• You can compute the dollar value of the benefits of increasing capacity in department one. Your suggested solutions should reflect that information.

• In these cases you have some context and hints from which to base suggestions for improvement. Tailor you solutions to the case at hand.

W. Bentz EMBA 802 8


• Increasing throughput is just one approach

• Pricing changes is a way of increasing income within the current constraints.

• Balancing inputs in the context of current constraints is another.

• Do not forget customer focus, etc.

W. Bentz EMBA 802 9

Learning CurveLearning Curve

W. Bentz EMBA 802 10

Learning CurveLearning Curve

• Learning is a general, observable phenomena that has been documented for a wide variety of activities. It is not unproven theory; it is an observable phenomena. The effect has been documented in aircraft and aircraft component manufacture, electric power generation, fluid catalytic cracking units, refinery maintenance and shut-down, surgery (1999), and more.


Learning Curves - IILearning Curves - II

• The potential rate of learning can be large enough to significantly influence strategic decisions, economic forecasts, profit plans, budgets, production schedules, and the evaluation of both economic and managerial performance.


Learning Curves - IIILearning Curves - III

• The learning rate is sufficiently regular to be predictable. The potential rate of learning is a function of the inherent susceptibility of an operation to improvement. Because learning tends to be so regular, the projection of a particular pattern of learning is more valid than assuming no learning.


Learning Curves - IVLearning Curves - IV

• The rate of learning achieved is related to the dynamic environment in which an activity is performed. Faith (optimism), incentives, and necessity stimulate progress and provide the drive to exert the energy, resourcefulness, skill, and persistence needed to bring it about. Ceiling psychology and the tendency to maintain the status quo inhibit learning.


Influencing ConditionsInfluencing Conditions

• A strategy consistent with the pursuit of cost reduction.

• Management understanding, support, contribution and belief.

• Task characteristics and process structure.

• Opportunity to standardize products and control changes

• Funds available for capital investment


Methods of ImprovingMethods of Improving

• Improved task and process design

• Improved product design

• Increased scale that reduces support costs as a percent of total cost

• Increased capital turnover through improved inventory management, facility utilization, process design, and product design.


Models of LearningModels of Learning

• Unit model of input per unit of output:

learning. toduety productivi in increase

of rate thespecifiesthat parameter learning theis

and units, in volumeproduction cumulative theisx

unit,first for the requiredinput ofamount theisa

output, ofunit per input average theis y where,

axy

Inputs can be costs or quantities


The Learning RatioThe Learning Ratio

2

2

unitsfirst x for theinput Average

units2x first for theinput Average

1

2

r

ax

xar

y

yr

r


Learning Curves

-

20.000

40.000

60.0001 3 5 7 9

Cumulative Production

Avg

. Un

it C

os

t

80% Learning

85% Learning

90% Learning

100% Learning


ImplicationsImplications

• From the above expression, we can calculate the learning rate “r” for a given parameter, or for a given parameter, we can calculate the associated learning rate.

2log

log

2loglog

2

r

r

r


Total InputTotal Input

Total input (TI) = x(ax-ß)

= ax1-ß

Marginal input = (1-ß)ax -ß

Incremental input = x2y2- x1y1 for x2 > x1

11

12 axax


Post-Production ReviewsPost-Production Reviews

12

12

loglog

loglogˆxx

yy

Once production has taken place, we can review the results to see if the learning parameter realized is comparable to that expected.



• Break for it!


Basic Activity ViewBasic Activity View

Outputs

INPUTS

Input/Output Ratios


Input/Output RelationshipsInput/Output Relationships

INPUTS OUTPUTS

Yield or Productivity

Efficiency


Basic Activity ViewBasic Activity View

Outputs

INPUTS

Input/Output

Utilization

Rates

Productivity


Documents

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