RIDING THE EXPERIENCE CURVE


FIGURE 2 EXPERIENCE CURVE


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Average unit cost reduction: F-35, LRIP 1-8 Actual versus predicted


burdensome when these practices are rig- orously applied.


With reference to the Army’s acquisi- tion process, the experience curve is most adaptable to the production and deploy- ment phase marked by milestone (MS) C. To a lesser degree, it could benefit the system development and demonstration phase, denoted by MS B. But its pros- pects for the activities preceding MS A are projected to be marginal.


50 100 Units produced PREDICTED VS. ACTUAL DECLINE


The F-35’s actual cost over time, in blue, and predicted cost over time, in red, follow roughly the same downward path, but the absolute numbers are different, especially in early production. Why the disparity? The mathematical model that generates predicted data is just that—a model—and can’t take into account some real-world events that can affect labor and part costs. (SOURCE: Sudhakar Arepally, DASA(DE&C))


Te 15.5 percent degree of decrease in the unit cost for the F-35 case is a notewor- thy output of the model. In other words, every time the F-35 production output doubles, the average unit cost decreases by 15.5 percent. (In theory, this specific curve is denoted as the 84.5 percent expe- rience curve, 84.5 being the difference between 15.5 and 100.) Tis reinforces empirical evidence from numerous stud- ies supporting cost reductions from 5 to 30 percent.


THE EXPERIENCE CURVE AND ACQUISITION As with the F-35 fighter aircraft, the Army, too, should be able to harness the cost benefits of the experience curve. Te experience curve is all the more invit- ing to embrace because its advantages


22 Army AL&T Magazine July-September 2017


extend beyond labor hours saved to other functions across a firm’s (or service’s) operations. Both fixed and variable costs offer possibilities for lowering the cost structure with organizational learning. For instance, high-volume batch orders and long-term contracts could lower pro- curement costs.


Te Army can accelerate the cost sav- ings by routinely deploying industry best practices—continuous improvement initiatives such as value analysis, value engineering and Lean Six Sigma—to continually reduce or eliminate waste and cut costs while improving product quality. Even management and adminis- trative functions, the “overhead” regarded as a necessary evil among customers, tend to shrink and become minimally


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If we apply the experience curve approach to Army acquisition as an integral part of the broader acquisition strategy for new Army programs, then program cost man- agement over the long term should be more disciplined. As a routine process, the acquisition team currently prepares an internal cost estimate before releasing the request for proposal (RFP) to defense equipment manufacturers before MS C. Along with several other performance cri- teria, the team weighs the cost parameters in the overall evaluation of contractors’ bid proposals.


Given an estimated average unit cost of the first article produced (e.g., the first unit of LRIP), a series of cost curves, henceforth called iso-experience curves, can be generated using the power law model. (See Figure 3.) Te iso-experience curves illustrate average unit cost reduc- tions ranging from 5 to 30 percent (or conversely, the 95 percent experience curve to 70 percent experience curve).


Figure 4 on Page 24 shows the experience curves for a notional production run of 10 units. To understand the calculations, let us consider the values pertaining to the 95 percent experience curve. It is assumed that the cost for the first unit is 1,000. To calculate the cost for the sec- ond unit using the model, the values of 1,000 (first unit cost), 2 (second unit),


Unit cost


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