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What's Experience Got to Do With It? Sources of Cost Reduction in a Large Specialty Chemicals Producer

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Author Info

  • Gavin Sinclair

    ()
    (School of Technology, Purdue University, West Lafayette, Indiana 47907)

  • Steven Klepper

    ()
    (College of Humanities ... Social Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Wesley Cohen

    ()
    (College of Humanities ... Social Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Conventional learning curves relating unit cost to measures of production experience are estimated for 221 specialty chemicals produced by a Fortune 500 company. Detailed records on cost and R...D coupled with insights from company personnel are used to explain the variation across products in the rate of cost reduction. Products that exhibited the strongest relationship between unit cost and measures of production experience were subject to specific initiatives, particularly process R...D. The R...D was not, however, generally motivated or informed, by production experience. However, cumulative past output, the most commonly used measure of production experience, was related to expected future output, which conditioned the expected future returns from R...D and the choice of R...D projects. Thus, cumulative output was connected to unit costs through its role in conditioning incentives to undertake process R...D rather than as a proxy for production experience. This suggests that the strong relationship commonly found between unit cost and measures of production experience may reflect incentives to reduce cost as much as learning from production experience.

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File URL: http://dx.doi.org/10.1287/mnsc.46.1.28.15133
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 46 (2000)
Issue (Month): 1 (January)
Pages: 28-45

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Handle: RePEc:inm:ormnsc:v:46:y:2000:i:1:p:28-45

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Keywords: Organizational Learning; Learning Curves; Process Innovation;

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Cited by:
  1. Nadeau, Marie-Claude & Kar, Ashish & Roth, Richard & Kirchain, Randolph, 2010. "A dynamic process-based cost modeling approach to understand learning effects in manufacturing," International Journal of Production Economics, Elsevier, vol. 128(1), pages 223-234, November.
  2. Demeester, Lieven L. & Qi, Mei, 2005. "Managing learning resources for consecutive product generations," International Journal of Production Economics, Elsevier, vol. 95(2), pages 265-283, February.
  3. Peter Thompson, 2008. "Learning by Doing," Working Papers 0806, Florida International University, Department of Economics.
  4. Mihaela Pintea & Peter Thompson, 2005. "Technological Complexity and Economic Growth," Working Papers 0502, Florida International University, Department of Economics.
  5. Yeh, Sonia & Rubin, Edward S., 2012. "A review of uncertainties in technology experience curves," Energy Economics, Elsevier, vol. 34(3), pages 762-771.
  6. Biskup, Dirk & Simons, Dirk, 2004. "Common due date scheduling with autonomous and induced learning," European Journal of Operational Research, Elsevier, vol. 159(3), pages 606-616, December.
  7. McNerney, James & Doyne Farmer, J. & Trancik, Jessika E., 2011. "Historical costs of coal-fired electricity and implications for the future," Energy Policy, Elsevier, vol. 39(6), pages 3042-3054, June.
  8. Peter Thompson & Mihaela Pintea, 2005. "Technological Complexity, R&D and Education: Some Pleasant Arithmetic," Computing in Economics and Finance 2005 185, Society for Computational Economics.
  9. Robert S. Huckman & Bradley R. Staats, 2008. "Variation in Experience and Team Familiarity: Addressing the Knowledge Acquisition-Application Problem," Harvard Business School Working Papers 09-035, Harvard Business School.
  10. Pillai, Unni & Cruz, Kyle, 2013. "Source of Cost Reduction in Solar Photovoltaics," MPRA Paper 46657, University Library of Munich, Germany.
  11. Sáenz-Royo, Carlos & Salas-Fumás, Vicente, 2013. "Learning to learn and productivity growth: Evidence from a new car-assembly plant," Omega, Elsevier, vol. 41(2), pages 336-344.
  12. Bradley, Steven W. & Wiklund, Johan & Shepherd, Dean A., 2011. "Swinging a double-edged sword: The effect of slack on entrepreneurial management and growth," Journal of Business Venturing, Elsevier, vol. 26(5), pages 537-554, September.
  13. Klaas, Brian S. & Klimchak, Malayka & Semadeni, Matthew & Holmes, Jeanne Johnson, 2010. "The adoption of human capital services by small and medium enterprises: A diffusion of innovation perspective," Journal of Business Venturing, Elsevier, vol. 25(4), pages 349-360, July.
  14. Natarajan Balasubramanian & Marvin Lieberman, 2006. "Industry Learning Environments and the Heterogeneity of Firm Performance," Working Papers 06-29, Center for Economic Studies, U.S. Census Bureau.
  15. Peter Thompson, 2012. "The Relationship between Unit Cost and Cumulative Quantity and the Evidence for Organizational Learning-by-Doing," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 203-24, Summer.

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