Experience curve effects

In management, models of the learning curve effect and the closely related experience curve effect express the relationship between equations for experience and efficiency or between efficiency gains and investment in the effort.

"Learning curves" were first observed by the 19th century German psychologist Hermann Ebbinghaus investigating the difficulty of memorizing varying numbers of verbal stimuli. Subsequent learning about the complex processes of learning are discussed in the Learning curve article.

Experience shows that the more times a task has been performed, the less time is required on each subsequent iteration. This relationship was probably first quantified in 1936 at Wright-Patterson Air Force Base in the United States, where it was determined that every time total aircraft production doubled, the required labour time decreased by 10 to 15 percent. Subsequent empirical studies from other industries have yielded different values ranging from only a couple of percent up to 30%, but in most cases it is a constant percentage: It did not vary at different scales of operation. The Learning Curve model posits that for each doubling of the total quantity of items produced, costs decrease by a fixed proportion.

Empirical research has validated the following mathematical form for the unit cost, P_x, producing unit number x starting with P₁ for a wide variety of different products and services:

where (1-b) is the proportion reduction in the unit cost with each doubling in the cumulative production. To see this, note the following:

Of course, this is only a statistical average and will rarely if ever exactly predict the unit cost of producing any future product. However, it has been found to be useful in many contexts with b ranging from 0.75 to 0.9 in different industries (so 1-b ranges from 0.1 to 0.25, as noted elsewhere in this article).

Generally the production of any good or service shows the experience curve effect. Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant percentage.

The Experience Curve was developed by Bruce D. Henderson and the Boston Consulting Group (BCG) while analyzing overall cost behavior in the 1960s. In 1968, Henderson and BCG began to emphasize the implications of the experience curve for strategy. Research by BCG in the 1960s and 70s observed experience curve effects for various industries that ranged from 10 to 25 percent.

...
Wikipedia