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

  • 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)

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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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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  1. Eric D. Darr & Linda Argote & Dennis Epple, 1995. "The Acquisition, Transfer, and Depreciation of Knowledge in Service Organizations: Productivity in Franchises," Management Science, INFORMS, vol. 41(11), pages 1750-1762, November.
  2. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
  3. von Hippel, Eric & Tyre, Marcie J., 1995. "How learning by doing is done: problem identification in novel process equipment," Research Policy, Elsevier, vol. 24(1), pages 1-12, January.
  4. Epple, D. & Argote, L. & Darr, E.D., 1995. "The Acquisition, Transfer and Depreciation of Knowledge in Service Organisations: Productivity in Franchises," GSIA Working Papers 1995-16, Carnegie Mellon University, Tepper School of Business.
  5. Marvin B. Lieberman, 1984. "The Learning Curve and Pricing in the Chemical Processing Industries," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 213-228, Summer.
  6. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
  7. Linda Argote & Sara L. Beckman & Dennis Epple, 1990. "The Persistence and Transfer of Learning in Industrial Settings," Management Science, INFORMS, vol. 36(2), pages 140-154, February.
  8. Drew Fudenberg & Jean Tirole, 1983. "Learning-by-Doing and Market Performance," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 522-530, Autumn.
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