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

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.