What is the ‘experience effect?’ We look at how the experience gained over time by manufacturers who are producing the same products can lead to cost reductions and efficiency improvements. To illustrate this, we give some examples of different industries where the experience effect provides benefits, such as aerospace, automotive, and semiconductors.
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The example of Boeing in the 40s and 50s.
Boeing enjoyed substantial efficiency gains and cost reductions that materialized from continuous learning and experience in the 40s and 50s as can be seen in the mass production of military aircraft such as the B17 bomber which started production in 1941. They tracked how many people worked on it, units made, etc, and in year one it took 141,000 man-hours to manufacture one unit, but in year two it took only 45,000, that’s a 2x reduction! Over the years it went down to 15,000 man-hours per airplane, which is almost a 10x reduction from when it was introduced. Consulting firms took the data and found that costs go down as you gain experience in manufacturing the same product (or doing the same kind of activity, providing services, etc), naming it the experience curve and pushing it in the 60s and 70s. (00:51)
The theory behind the experience effect.
The experience effect is based on the experience gained by the cumulative amount that you manufacture over a relatively short time. When a manufacturing plant makes the same product they gain experience, just like when you do the same thing time and again you generally get better at it, it’s the same principle. They use this to become more efficient in making the same output (and making it better at the same time). When we look at semiconductors or chips, the first production tends to have relatively poor yields and a lot of defective chips, but as time passes they improve the processes and reduce defectives a lot and the costs along with them. Highly complex productions tend to enjoy greater benefits from the experience effect over time as there are more things to work out and improve over simple products, and productions in a stable environment, such as the same plant, staff, and configurations also tend to improve more as experience is gained. Continuous production, rather than batches, like in airplane manufacturing, also gives a greater experience effect, as you have staff constantly working and learning.
Experience effect is not the same as economies of scale. That’s about batch size and is where if you make products in batches of 100k you can get a lower unit cost than when manufacturing in smaller batches of, say, 1000 as the production cost is spread over more units and you can often receive lower costs from suppliers by buying more components, materials, etc, in one go. However, when increasing the batch quantities, you will eventually hit a point where unit cost rises again because of the cost of putting a very large capacity and workforce in place, whereas there is really no set limit to how much experience one can gain. (04:04)
It’s more than just individuals improving on the production line…the whole business must evolve.
Individual workers getting better at their jobs is one element of the experience effect for sure, but it is also about the pivotal role of continuous production, engineering expertise, astute management, rigorous quality control, and advanced automation in the organization.
For example, over time tools and SOPs are improved and wasted time and motion are reduced, improving efficiency and reducing costs. However, these require quality, process, and industrial engineering resources and the attention of management to pinpoint areas of improvement and to drive them, such as implementing automation.
Suppliers should also contribute and benefit from the experience work and may need to be pushed to invest in engineering work and management attention, and may also need support from your own engineers to get up to speed, as their success is directly related to your own. (12:10)
Pilot and starting costs are higher, but don’t be tempted to skip ahead.
NRE costs are one-off costs that make up part of the production cost for the products, such as custom-made jigs and fixtures. The cost of a startup product will be higher because there are more NRE costs and other associated startup costs such as the inefficiencies of the processes which will be reduced over time once the right equipment is in place and the processes have been honed. We fully expect the pilot-run products to come in at maybe even triple the price per unit than those from the mass production run that has been happening for a while due to the NRE costs and the cost of the extra engineering and management oversight. This isn’t to say that a pilot run should be skipped to save on costs, as the first pieces will always be more likely to have problems that need fixing and some extra costs, and if you’re going straight into production instead of running the pilot you’re risking putting a lot more material through the line and opening yourself up to defects on a much higher scale which will turn out more costly than the pilot. (20:00)
The learning curve.
The learning curve when manufacturing a product is either steep or shallow. For complex products, it’s often better to take your time and learn everything carefully to avoid issues later on, having a shallow learning curve, perhaps moving a little more slowly in order not to miss something or make mistakes, such as rising into production and not following a structured NPI process. (25:46)
How does the experience effect translate in commercial terms?
In consumer electronics, for example, a certain model of phone will have 12-18 months of useful lifetime before needing to be replaced, so the experience effect can be weaker. Also if purchasers have a very transactional relationship with suppliers and always drive for cost reductions, the relationship can suffer and the supplier will be less interested in helping to improve efficiency and reduce costs and can be less open over time, especially if they feel that any efficiency improvements made will be used a stick to drive for more cost reductions from them. (28:23)
Who does improvement work the right way?
Automotive plants tend to do cost reduction and efficiency improvements well because the plant GM does not control purchasing but does control what happens in the plant. They may have a cost reduction plan, such as reducing scrap, rework, labor costs, etc. A smart manager may look at efficiency savings from reducing equipment downtime by doing more maintenance, also improving quality as machines are in better condition, looking at opportunities to automate some processes, engaging suppliers to find ways to fix problems with parts and materials, etc. They will seek to have their team engaged and actively thinking about how to improve quality, cost, and efficiency. (32:54)
Conclusion.
The experience effect is not about one aspect of production, it’s about a comprehensive approach towards manufacturing. This includes smart management, supply chain management, controlling the components coming into the factory, and more. If a business is working as we’ve discussed and is being carefully managed with a key focus on continuous improvement, this will yield cost reductions and efficiency improvements over the years, but this goes far beyond just reducing the cost of a product. (35:10)