From the course: Purchasing Foundations
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Learning curve analysis
- Practice makes perfect, we've all heard that. Professional athletes certainly prove this to be true. Even the very best baseball players take batting practice every day. In general, the more you do something, the better you are at it, which is a result of your learning. You can also apply this principle to your business with what is called the learning curve. The learning curve applies to direct labor costs in a production factory. It establishes the rate of improvement in direct labor costs as production volume increases. Each time production volume doubles, you improve at a specified rate. For example, an 85% learning curve states that each time your production volume doubles, you realize a 15% reduction in direct labor costs per unit. So how do you apply the learning curve? Here's a good example applied to a purchasing contract. Your supplier has already completed an order for 200 pieces, and in the cost breakdown of that order, direct labor costs were $50 per unit because it…
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