This article was prepared by Deloitte South Africa Strategy team. If you require a more in-depth discussion on the subject, feel free to contact Dr Werner van Antwerpen at wvanantwerpen@deloitte.co.za
Experience Curves: A powerful management tool to drive operational efficiency and improved forecasting
In an increasingly competitive business environment, a management team’s ability to accurately forecast its costs and productivity is a key driver of business value. Experience curve theory is a powerful analytical methodology that can support a management team in determining realistic and measurable forecasts based on specific industry benchmarks and achievements.
This article outlines Deloitte’s point of view on how the experience curve can be leveraged to support leadership teams in setting realistic targets and then managing value. With a focused approach, the experience curve forecasting and monitoring process becomes a key enabler to realising superior productivity enhancements.
The experience curve theory has a wide spread of applicability for any organisation that uses a repetitive process. The theory suggests that for every doubling of a unit of production, productivity tends to constantly improve by a factor called the Progress Ratio (PR). The construction of large engineering projects is one example where experience curve theory is readily applied. The principle of experience curve theory is captured in Figure 1 below. Quite simply, if a construction firm is building 8 engineering structures where the first structure has cost $100m, the second unit will cost $85m, the 4th unit will cost $72m and the last unit will cost $61m.
It can be seen that a considerable saving of $39m has been achieved when building the 8th unit, if the initial cost was estimated at $100m.
As companies grapple with current operating environment complexities, the real value of experience curves has become somewhat underutilised because companies do not translate the calculated results into business strategy. In essence, when used as part of the budget setting and performance management processes, experience curve theory is an effective tool.
In Deloitte’s experience, management teams that link quantitative results to business strategy tend to achieve greater success. Using experience curve theory in this practical manner is a key differentiator to drive operational efficiency and improve profitability forecasting.
Read the full article . . . . Experience Curves: A powerful management tool to drive operational efficiency and improved forecasting
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Filed under: Executive Leadership, accurately forecast, budget setting, business strategy, business value, Deloitte, Experience Curves, forecasting and monitoring process, improved forecasting, managing value, operational efficiency, performance management, productivity, profitability forecasting, Progress Ratio, quantitative results, setting realistic targets
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