Slide 1

Mass Customization and the Learning Curve

Appendix 9A

• Mass customization is the new trend of making products partially mass produced, and partially customized.

• Land’s 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 bags – this 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.

South-Western Publishing

Slide 2

Learning Curve Relationship

• “Learning by doing" has wide application in production 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 the amount 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.

Slide 3

• Functionally, the learning curve relationship can be written C = a·Qb, where C is the input cost of the Qth unit:

• Taking the (natural) logarithm of both sides, we get: log C = log a + b·log Q

• The coefficient b tells us the extent of the learning curve effect.» If the b = 0, then costs are at a constant level.» If b > 0, then costs rise in output, which is exactly

opposite of the learning curve effect.» If b < 0, then costs decline in output, as predicted by

the learning curve effect.

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 forth baskets, the manager estimates the following regression.

Ln T = .4 - .02 • Q R2 = .834 N = 30

(3.1) (2.6)

where T is time it took to make a basket and Q is the accumulated number of baskets made, and the parentheses contain t-statistics.

Q: Is this firm finding any benefits of Learning 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.

Slide 5

Percentage of Learning

• The proportion by which costs are reduced through DOUBLING output is estimated as follows:

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 = 2•Q1).

• If the percentage of learning, L = 82%, then input costs decline 18% as output doubles. » The percentage of learning is 100% - L.

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