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Experience Curves:

A powerful management tool to drive


operational efficiency and improved forecasting
It can be seen that a considerable saving of $39m has
th
The forgotten art of using experience been achieved when building the 8 unit, if the initial
cost was estimated at $100m.
curves to improve management
practices As companies grapple with current operating
environment complexities, the real value of experience
In an increasingly competitive business environment, a
curves has become somewhat underutilised because
management teams ability to accurately forecast its
companies do not translate the calculated results into
costs and productivity is a key driver of business value.
business strategy. In essence, when used as part of the
Experience curve theory is a powerful analytical
budget setting and performance management
methodology that can support a management team in
processes, experience curve theory is an effective tool.
determining realistic and measurable forecasts based on
specific industry benchmarks and achievements.
In Deloittes experience, management teams that link
quantitative results to business strategy tend to achieve
This article outlines Deloittes point of view on how the
greater success. Using experience curve theory in this
experience curve can be leveraged to support
practical manner is a key differentiator to drive
leadership teams in setting realistic targets and then
operational efficiency and improve profitability
managing value. With a focused approach, the
forecasting.
experience curve forecasting and monitoring process
becomes a key enabler to realising superior productivity
Interpretation: Learning curve vs. Experience curve
enhancements.
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Wideman noted that confusion arises in the
The experience curve theory has a wide spread of
construction and mining industries regarding the use
applicability for any organisation that uses a repetitive
of the term learning curve. Because work typically
process. The theory suggests that for every doubling of
takes place under unique conditions at a unique site,
a unit of production, productivity tends to constantly
it is useful to differentiate between productivity
improve by a factor called the Progress Ratio (PR). The
improvement due to learning and that due to
construction of large engineering projects is one
experience.
example where experience curve theory is readily
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applied. The principle of experience curve theory is Wideman uses the following example to distinguish
captured in Figure 1 below. Quite simply, if a between the two terms. As craft apprentices learn
construction firm is building 8 engineering structures their trade, productivity increases. However, when
where the first structure has cost $100m, the second skilled craftsmen perform a specific task on site and
th
unit will cost $85m, the 4 unit will cost $72m and the repeat it a number of times, there is a similar
last unit will cost $61m. productivity increase. The former increase is due to
learning the skill, while the latter is due to acquiring
$100m experience of the particular site conditions
associated with the work activity at the time, which
also can be called organisational learning.
$61m

Therefore, learning can be traced back to individual


performance capabilities, which will differ for each
person and therefore be variable, while experience is
more related to particular site conditions. Unfortunately,
$0m
in reality these two conditions are difficult to dismantle.
However, from this aforementioned example one can
1 2 3 4 5 6 7 8 conclude that the combination of these two terms should
be variable.
Figure 1: 85% Progress Ratio (PR) over eight units.

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Wideman, M., 1994, A Pragmatic Approach to Using Resource Loading,
Production and Learning Curves on Construction Projects, Canadian Journal of Civil
Engineering, Vol. 21, pp. 939-953.
Linking experience curve theory to Management phase:
business strategy
This phase indicates that several interventions are in
Deloitte has developed an applied methodology which place to reduce cost or time and that management
caters for variable experience curve rates that are a should monitor and manage these interventions to
result of planned interventions / innovations (Figure 2). ensure progress.

Planning phase:
At this stage management should still monitor and
manage the implemented interventions. However,
research and planning should be done regarding
what the next innovative intervention or interventions
Cost

should be.

Implementation phase:
In this phase the planned intervention should be
implemented. After implementation, a new
segmented experience curve should be obtained and
1 2 3 4 5 6 7 8 9 10 11 12 the management phase will start again.
Units produced or time
Conventional Curve PR = 90%
Conventional Curve PR = 92%
Applied methodology Case study
The following case study shows the relevance of the
Figure 2: Illustration of how the rate of learning can differ but applied experience curve theory within the electrical
still reach the same end result after several units are produced. utility industry. Data was obtained for a major US utility.
Contractor labour cost on construction, plant overhaul
From this applied methodology, Deloitte is able to link and modification projects were analysed and an applied
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the results to operational strategy. This is done through experience curve was fitted (Figure 4) .
using cumulative learning to predict three different
management phases. In Figure 3, the unit or time period Unproductive contracted labour utilization
at which the cumulative learning is 65% and 95% from 50%
the optimum cumulative learning is predicted. By
identifying the phase the company finds itself in, Deloitte 45%

is able to identify when new productivity interventions Management phase


40%
are needed for performance optimisation. Thereafter,
Planning phase
an intervention roll out strategy can be developed, 35%
further linking the mathematical theory to the business Implementation phase
and operational logic. 30%

Optimum 25%
learning
20%
Management
Cumulative Learning

phase 95% of optimum 15%


65% of
learning
optimum 10%
learning
0 2 4 6 8 10 12 14 16 18

Planning Implementation Half years


phase Applied experience curve
phase
Historical data
Implemented intervention (illustration)

Figure 4: Continuous work process improvement at a major


utility from 1993 through early 2001.
0 5 10 15 20 25 30 35

Units produced or time


Variable learning

Figure 3: Illustration of how simulated cumulative learning 2


Picard, H.E., 2002, Construction process measurement and improvement,
varies with consecutive units produced. Construction management consultants.
From Figure 4, it is shown that the management phase identify where strategic intervention is required. The
is between zero and three (zero and 1.5 years) while the Deloitte approach to using the experience curve enables
planning phase is between three and six (1.5 and three management to drive for value in a more disciplined
years). The more data points become available the more manner.
accurate the prediction becomes.

Figure 4 also indicates how a roll-out of a planned The Deloitte Strategy & Innovation practice helps
intervention should impact contracted labour utilization. clients to solve their most complex business challenges.
Ranked by Kennedy as the leading strategy business in
Conclusion Africa, it is also the largest with an enviable track
In conclusion, experience curve theory can be used to record of partnering with both private and public sector
improve managements forecasts, as well as affording
management the ability to track performance, and
clients. We pride ourselves on the breadth and depth of
our skills.....and in developing executable strategies for
our clients.
Contact information:

Mike Vincent Anton Torlutter Stephen Povey Dr Werner van Antwerpen


Deloitte Consulting Deloitte Consulting Deloitte Consulting Deloitte Consulting
Director: Strategy & Innovation Executive Lead: Strategy & Innovation Lead: Strategy & Innovation Lead: Strategy & Innovation
Tel: +27 11 806 5400 Tel: +27 11 806 5400 Tel: +27 11 806 5400 Tel: +27 11 806 5400
Email: mivincent@deloitte.co.za Email: atorlutter@deloitte.co.za Email: spovey@deloitte.co.za Email: wvanantwerpen@deloitte.co.za

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