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Mass Customization and the Learning Curve Appendix 7APowerPoint Presentation

Mass Customization and the Learning Curve Appendix 7A

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Mass Customization and the Learning CurveAppendix 7A

- 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.

2005 South-Western Publishing

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.

- 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.

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.

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.
- Thepercentage of learningis100% - L.

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

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