Agenda Today

1. Agenda Today • Comments on Prairie State Paper Co. • Comments on Quiz 3 • Comments on ABKY 7-42 • The learning curve phenomena • Comment on Quiz 4 EMBA 802

2. Prairie 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. EMBA 802

3. Prairie State Wrap-Up • 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. EMBA 802

4. Prairie State Wrap-Up • 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. EMBA 802

5. Prairie State Wrap-Up • 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. EMBA 802

6. ABKY 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. EMBA 802

7. ABKY 7-42 Wrap-Up • 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. EMBA 802

8. ABKY 7-42 Wrap-Up • 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. EMBA 802

9. Learning Curve EMBA 802

10. Learning 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. EMBA 802

11. Learning 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. EMBA 802

12. Learning 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. EMBA 802

13. Learning 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. EMBA 802

14. Influencing 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 EMBA 802

15. Methods 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. EMBA 802

16. Models of Learning • Unit model of input per unit of output: Inputs can be costs or quantities EMBA 802

17. The Learning Ratio EMBA 802

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19. Implications • 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. EMBA 802

20. Total Input Total input (TI) = x(ax-ß) = ax1-ß Marginal input =(1-ß)ax -ß Incremental input = x2y2- x1y1 for x2 > x1 EMBA 802

21. Post-Production Reviews Once production has taken place, we can review the results to see if the learning parameter realized is comparable to that expected. EMBA 802

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23. Break for it! EMBA 802

24. Basic Activity View Activity INPUTS Outputs Input/Output Ratios EMBA 802

25. Input/Output Relationships Yield or Productivity INPUTS OUTPUTS Efficiency EMBA 802

26. Basic Activity View Utilization Rates Productivity Activity INPUTS Outputs Input/Output EMBA 802

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