Key Difference – Learning Curve vs Experience Curve
The key difference between learning curve and experience curve is that learning curve is a graphical representation that shows the decrease in average labor cost in repetitive operations as the employees obtain more learning whereas experience curve depicts the overall cost saving as the production grows in volume. The rise in cost of production is a continuous challenge faced by companies. The continuous focus on cost control and cost reduction is essential if they are to maintain current price levels and market share.
CONTENTS
1. Overview and Key Difference
2. What is Learning Curve
3. What is Experience Curve
4. Side by Side Comparison – Learning Curve vs Experience Curve
5. Summary
What is Learning Curve?
Learning curve is a graphical representation that depicts the decrease in average labor cost in repetitive operations as the employees obtain more learning. Learning is a continuous process, and the concept of learning curve states that when an employee’s work is repetitive in nature, he or she will take lesser time to produce the subsequent units as the production increases, thus will report higher productivity. The learning curve was first explained by psychologist Hermann Ebbinghaus in 1885, and since then, it is used to measure production efficiency.
The effect of the learning curve is calculated by the learning curve ratio.
Learning Curve Ratio = Average Labor Cost of first 2N units / Average Labor Cost of first N units
E.g. PQR Company incurs an average labor cost of $15 per unit, for the first 400 units and the average labor cost of the first 800 units is $12 per unit. Thus, the learning curve ratio will be,
Learning curve ratio = ($12/$15)* 100 = 80%
The above ratio of 80% means that every time the output doubles, the average labor costs will decline to 80% of the preceding amount. Using the formula, the decline in labor cost can be calculated based on the increase in output. For instance, for 1600 units, average labor cost per unit will be $9.6 per unit ($12* 80%).
Figure 01: Learning curve depicts the relationship between the improvement in functionality and time
Learning curve facilitates cost-volume-profit relationship by providing useful estimations of costs. This information can be used to reward employees and ultimately for setting selling prices. The use of learning curve is most appropriate for manufacturing organizations, which are labor intensive since employees produced standardized products. This is not applicable for service related and project related companies since they often deliver a customized output to their clients. Furthermore, many organizations believe that their businesses are unique, thus learning curve concept cannot be used as a suitable evaluation tool. There is also a lack of awareness that the improvements in production processes can be adequately quantified. Due to these reasons, the use of learning curves may not be widespread.
What is Experience Curve?
Experiences curve is a graphical representation that shows the relationship between the cost of production and cumulative production. This is a broader concept compared to learning curve where the effects of other costs of production in addition to labor are considered. The Experience Curve was developed in the 1960s by Bruce D. Henderson and the Boston Consulting Group (BCG). Research conducted by them observed experience curve effects for various industries that ranged from 10% to 25%. Companies experience cost reductions through,
- Labor efficiency
- Specialization and standardization
- Better resource allocation
- Research and development
- Technological effects
Experience curve assists companies to achieve a position of competitive cost advantage. Companies who practice ‘cost leadership’ strategy (lowest cost of operation in the industry) are the companies who have gathered cost advantages exceeding that of all the competitors. However, many academic and business practitioners have criticized experience curve saying that many cost savings are in fact a result of economies of scale. Thus, the effect of experience curve and economies of scale cannot be separated from one another.
What is the difference between Learning Curve and Experience Curve?
Learning Curve vs Experience Curve |
|
| Learning curve is a graphical representation that shows the decrease in average labor cost in repetitive operations as the employees obtain more learning. | Experience curve depicts the overall cost saving as the production grows in volume. |
| Development | |
| Learning curve was developed in 1885 by psychologist Hermann Ebbinghaus. | Experience curve is developed by Bruce D. Henderson and the Boston Consulting Group in the 1960s. |
| Use | |
| Savings from learning curve effect is primarily used for forecasting labor costs. | Savings from experience curve effect is broader and have a strategic value. |
Summary – Learning Curve vs Experience Curve
The difference between learning curve and experience curve is that learning curve takes into account the reduction in labor cost as the number of units increase whereas experience curve depicts the overall cost reduction considering all factors of production. While both are predominantly designed to be used in manufacturing environments, experience curve is a better yardstick from a strategic perspective. Reduction in cost levels through effects of learning curve and experience curve allow companies to enjoy better profits.
References
1.”Learning Curve.” Investopedia. N.p., 06 Sept. 2010. Web. 31 Mar. 2017.
2.Hirschmann, Winfred B. “Profit from the Learning Curve.” Harvard Business Review. N.p., 01 Aug. 2014. Web. 30 Mar. 2017.
3.NetMBA.com. “Experience Curve.” Experience Curve. N.p., n.d. Web. 31 Mar. 2017.
4.”Experience Curve – Cost Reduction Strategy.” Paul Simister’s Business Coaching Blog. N.p., n.d. Web. 31 Mar. 2017.
Image Courtesy:
1. “Learning Curve Diagram – Steep and Shallow – Different Functionality” By Alanf777 – Created in a Microsft Excel Chart (CC BY-SA 3.0) via Commons Wikimedia