Using the forgotten art of “Experience Curves” to improve management practices

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

Revving up business performance – Enabling an integrated approach to performance management through technology

B.C. Forbes declared, “If you don’t drive your business, you will be driven out of business.” Unfortunately, it’s hard to drive when you can’t see. Despite massive investments in ERP, CRM, and other enterprise systems, many companies still don’t have the information they need to make good business decisions.

In most cases, the problem isn’t a lack of information – it’s a lack of insight. Performance Management Technology (PMT) can help by enabling an integrated approach to all aspects of performance management, from budgeting, planning, and forecasting to financial consolidation and reporting. Many companies view these processes as necessary evils. The activities are time-consuming, slow, and inefficient, and rely heavily on spreadsheets and manual effort. Also, the final output often has little connection to the company’s business strategy – or to what people on the front lines actually do.

Technology, when tempered with business know-how, can provide the foundation for an integrated approach to managing performance. The results? Performance management processes that should be fast, efficient, and repeatable – and information that should be timely, accurate, relevant, and consistent across the enterprise. This integrated approach can support your strategic agenda by providing forward-looking financial and non-financial insights that can help you make better decisions, change direction more quickly, and capitalize on new opportunities.

Read the full article . . . . Revving up business performance – Enabling an integrated approach to performance management through technology

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Filed under: Information Technology, Deloitte, performance management