You can win big in the contracting arena, if you know your learning curves. Imagine being able to beat out your competitors because you not only know your labor costs now, but also how much they are going to decrease as production numbers increase.(The examples given are about production, but the same principles apply to the service industry.)
Learning curves are a way of putting numbers to a human phenomenon. We(us humans) become more efficient as we repeat a task. We learn. That learning progresses at a regular rate. The common expression of the learning rate is as follows:
Factory A produced Widget number 100 with a labor time of 40 hours. Widget number 200 was produced in a time of 36 hours. So, for a doubled number of units produced, it took 0.9 of the labor time for the 200th unit versus the 100th unit. We can then say that we have a 90% learning curve.
That's nice, but how does it help you to win a contract? Let's look at an example of how this works:
Suppose your company and a competitor are preparing a bid to make 100,000 Wonkers for the government. Both of your companies have produced Wonkers before. Your competitor makes the following calculation:
12,000 Wonkers produced using 18,000 labor hours. The average labor hours per Wonker is 1.5 hours. He makes his bid based on 1.5 labor hours per unit.
Your company's experience is as follows:
8,000 Wonkers produced using 16,000 labor hours. The labor hours per Wonker is 2.0 hours.
If your company made a bid with only this information it would be based on 2.0 hours per Wonker. Your bid would obviously be higher than your competitor.
However, you know learning curve theory. Using the data from your previous production of Wonkers you find that you have a 92% learning curve. Whenever you double the number of units produced your labor time will decrease by 8%. In addition you discover that the 8,000th unit required only 1.75 hours of labor.
You then make the following analysis:
Unit Labor
Num. Time
8,000 1.75
16,000 1.61
32,000 1.48
64,000 1.36
128,000 1.25
The above is the labor required for each of the designated unit numbers. (8% reduction after doubling)
Ave. Prod. Total
Time Units Time
1.68 8,000 13,440
1.55 16,000 24,800
1.42 32,000 45,440
1.33 36,000 49,320
Total 100,000 133,000
The above shows the average labor time for a range of production units. (e.g. the average labor time for the 8,000th thorough the 16,000th unit is (1.75 + 1.61)/2 or 1.68 hours.)
The total is 133,000 hours to produce 100,000 Wonkers. This gives an average labor time of 1.33 hours for each Wonker. Your bid will be lower than your competitor's bid.
It is clear that you could have a great advantage over a competitor that was ignorant of how learning curves work. From the information available about your competitor, it is likely that his labor times would be lower than yours. If he would have made learning curve calculations like you did, he would have known this. He lost the contract because he did not know how to calculate his labor costs based on learning curve theory.
Learning curves can be a great asset in bidding for many types of jobs. You will be able to define your labor costs with great precision. As you know the lowest bid wins the game!
