Tag Archives: 85%

Learning Curves: Boeing 787 case (from Dec 2012 to Dec 2014)

Last year, I wrote in a couple of posts an introduction to the concept of the learning curve and provided a the case of the Boeing 787 in 2013 (based on figures disclosed by Boeing CFO, Greg Smith). In the first of those posts, I discussed that:

Boeing does not disclose outright what is the actual learning curve it is achieving in its program. Nevertheless, in its investor relations conferences it provides information here and there of cost savings achieved, etc. This can be interpreted as derived from learning curve effects, and would permit to build a model, even if based on scarce information.

This year again, let me quote again one of those excerpts from Boeing executives in order to update the exercise:

On the 787-8, we’ve seen a decline in unit cost of approximately 30% over the last 175 deliveries and on 787-9, we’ve seen declines of 20% since the first delivery. Based on this progress, our production schedule and planned productivity investments, we continue to expect the 787 to be cash positive during 2015 and we still anticipate deferred production to decline shortly after we’ve achieved the 12 per month production rate in 2016. No change to these fundamental milestones.” Greg Smith, Boeing EVP – CFO at Q4 2014 Earnings Conference

As I mentioned last year, to the avid reader, and knowledgeable and savvy analyst, this paragraph is enough to deduce an actual learning curve achieved by the 787 for each aircraft model, provided that information reported by Boeing CFO, Greg Smith, was accurate.

Through the end of 2014, Boeing had delivered 212 787-8 and 10 787-9. The 787-9 were all delivered in 2014. The 212 787-8 were delivered as follows:

  • 2011: 3 aircraft.
  • 2012: 44 a/c.
  • 2013: 63 a/c.
  • 2014: 102 a/c.

Greg Smith is mentioning a cost reduction of 30% over the last 175 deliveries. As he was talking at the 2014 earnings call, we can safely assume that the figures were put up for him using deliveries and costs only through the end 2014 (and not counting info from January 2015 deliveries). That means that the cost improvements are measured theoretically from the aircraft 37th through the 212th (175). You can extract a report from Boeing website of the complete 787 deliveries here. I did it. Analysing it you see that between the beginning of December 2012 and the end of December 2014 176 787-8 were delivered (1).

Thus, the exercise to find out what learning curve Boeing achieved during that time span is as simple as to see what learning curve yields an “approximately 30% unit cost improvement” from the unit 36th (2) to the unit 212th. The beauty is that we do not even need to know the initial unit cost to perform the calculation, as the relative improvements in terms of percentages are independent of the starting point. All the information has indeed been provided by Boeing.

As I did in the blog post of the last year, in this first graph below I just plotted some generic learning curves, from 95% to 75%. This form of representation provides a good view of how learning is intense at the beginning of the production process and it stabilizes later on. It also shows well how learning is more intense and cost reductions are bigger for a 75% curve than for a 95% curve.

Generic learning curves.

Generic learning curves.

However, in the previous curves it is difficult to distinguish the 36th and the 212th units which are needed for the calculation. Thus, I plotted the same curves in a log scale for the numbers of units produced in the graphic below:

Boeing 787 learning curve over 176 units through Dec 2014 calculation, delta unit cost between 36th & 212th units.

Boeing 787 learning curve over 176 units through Dec 2014 calculation, delta unit cost between 36th & 212th units.

In this second graphic I added the information of what relative cost reduction is achieved between the 36th and the 212th units for each of the curves (3).

To make sure that readers are not lost, let’s take the 87% curve (in red). Following that curve, the unit cost of the 36th unit produced is a 48.7% of the 1st unit cost, whereas the unit cost for the 212th unit produced is a 34.1% of the 1st unit cost. The difference is then 48.7% – 34.1% = 14.6%, which represents a 30.0% cost reduction from the 36th unit cost. If you follow the same calculation for each of the curves, you will obtain the following unit cost improvements between 36th and 212th units:

  • 95% curve: -12.3% unit cost improvement
  • 90% curve: -23.6% unit cost improvement
  • 87% curve: -30.0% unit cost improvement
  • 85% curve: -34.0% unit cost improvement
  • 80% curve: -43.5% unit cost improvement
  • 75% curve: -52.1% unit cost improvement

Thus, from the information provided by Boeing of units delivered and unit cost improvement (“approximately 30%″, Greg Smith) we can deduce that from December 2012 through December 2014 the average learning curve that the 787 program has achieved is about 87%. Thus, in line with aerospace average indicated by NASA (85%), or in line with the reported 84% achieved in the 777. Though a bit lower than that calculated for 2013 (see here last year’s post). We can interpret that mismatch as either as a minimum error inherent of these estimates (85% vs. 87%) or that indeed the rate of improvement has somehow slowed down in 2014 in comparison to 2013.

Had Boeing been able to achieve effectively a 85% curve in the last 175 deliveries, bear no doubt that the message from Greg Smith would have been along the lines of an approximate 35% cost reduction (being the mathematical result 34%), instead of the reported 30%.

All these numbers refer to the 787-8. Now, remember that Boeing CFO also indicated that “on 787-9, we’ve seen declines of 20% since the first delivery”. 

Here, the calculation that needs to be done is the same. 787-9 deliveries started in 2014. If we assume that Greg’s comment referred only to 2014 deliveries (not 2015 ones), then the calculation must be made on 10 787-9 delivered between June and December 2014.  Here the learning curve obtained is a 93.5% ~87-88% (5) (6).

(1) I guess Greg Smith rounded to 175, but his “decline in unit cost of approximately 30% over the last 175 deliveries” refers to actually some fixed internal monthly reports and is based on 176 deliveries (not 175). (4)

(2) Taking into account the note (1), I will use 176 aircraft and deliveries from the 36th aircraft through the 212th.

(3) Bear in mind what a relative cost reduction is in contrast to the fact of relative costs represented in the vertical axis as percentages of the initial cost (100%).

(4) The taking of 175 instead of 176 aircraft practically does not change the result. For the same 87% curve the calculated cost reduction in one case is 30% and in the other 29.6%.

(5) This is in line with the slow down of the learning curve for the 787-8 comparing 2013 result with the result along the time span December 2012-December 2014.

(6) I initially calculated 93.5% as a result of a 20% cost reduction between the 1st and 10th units produced. However, as Matt B pointed, the first 3 787-9 have not been delivered (though they are units produced from which there was a learning effect). When you calculate what is the result for a 20% cost reduction between units 4th and 13th (the first 10 delivered), you get a curve between 87-88%, more or less the same one than for 787-8. Thus, it seems than at the beginning of the 787-8 production they went along a 85% curve that has slowed to a 87% for both models.

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Learning Curves: Boeing 787 case in 2013

In the previous two posts I introduced the concept of learning curve and provided a case in point (based on figures attributed to A350 FAL by Leeham News). In the first of those posts, I discussed that:

Boeing does not disclose outright what is the actual learning curve it is achieving in its program. Nevertheless, in its investor relations conferences it provides information here and there of cost savings achieved, etc. This can be interpreted as derived from learning curve effects, and would permit to build a model, even if based on scarce information.

Let me quote again one of those excerpts from Boeing executives:

“We continue to see progress in key operational performance indicators and unit costs, as we further implement production efficiencies and stabilize the overall production system on the 787 program. Unit cost has improved approximately 20% over the past year on the 787-8 […]“Greg Smith, Boeing EVP – CFO at Q4 2013 Earnings Conference.

To the avid reader, and knowledgeable and savvy analyst, this paragraph is enough to deduce the actual learning curve achieved by the 787 during 2013, provided that information reported by Boeing CFO, Greg Smith, was accurate.

During 2013 Boeing delivered 65  787s, from the 50th to the 114th units (in previous years it had delivered already 3 in 2011 and 46 in 2012).

Thus, the exercise to find out what learning curve Boeing achieved in 2013 is as simple as to see what learning curve yields an “approximately 20% unit cost improvement” from the unit 50th to the unit 114th. The beauty is that we do not even need to know the initial unit cost to perform the calculation, as the relative improvements in terms of percentages are independent of the starting point. All the information has indeed been provided by Boeing.

In the first graph below I just plotted some generic learning curves, from 95% to 75%. This form of representation provides a good view of how learning is intense at the beginning of the production process and it stabilizes later on. It also shows well how learning is more intense and cost reductions are bigger for a 75% curve than for a 95% curve.

Generic learning curves.

Generic learning curves.

However, in the previous curve it is difficult to distinguish the 50th and the 114th units which are needed for the calculation. Thus, I plotted the same curves in with a log scale for the numbers of units produced in the graphic below:

Boeing 787 learning curve in 2013 calculation, delta unit cost between 50th & 114th units.

Boeing 787 learning curve in 2013 calculation, delta unit cost between 50th & 114th units.

In this second graphic I added the information of what relative cost reduction is achieved between the 50th and the 114th units for each of the curves (1).

To make sure that readers are not lost, let’s take the 85% curve. Following that curve, the unit cost of the 50th unit produced is a 40.2% of the 1st unit cost, whereas the unit cost for the 114th unit produced is a 32.9% of the 1st unit cost. The difference is then 40.2% – 32.9% = 7.2%, which represents a 18.0% cost reduction from the 50th unit cost. If you follow the same calculation for each of the curves, you will obtain the following unit cost improvements between 50th and 114th units:

  • 95% curve: -6.1% unit cost improvement
  • 90% curve: -12.0% unit cost improvement
  • 85% curve: -18.0% unit cost improvement
  • 80% curve: -23.8% unit cost improvement
  • 75% curve: -29.6% unit cost improvement

Thus, from the information provided by Boeing of units delivered and unit cost improvement (“approximately 20”, Greg Smith) we can deduce that during 2013 the learning curve that the 787 program has achieved is between 85% and 80%. Thus, in line with aerospace average indicated by NASA (85%), or in line with the reported 84% achieved in the 777.

If we wanted to know what learning curve yields exactly that 20% unit cost improvement, it is now trivial to calculate it: the 83.3% learning curve.

Having made these numbers, and taking into account the words used by Boeing CFO, “unit cost has improved approximately 20% over the past year on the 787-8″, I take it as that the improvement has been close to 20% though probably not reaching it; thus, I understand that the learning curve was rather between 83.3-85% instead of down to 83.3%.

(1) Bear in mind what a relative cost reduction is in contrast to the fact of relative costs represented in the vertical axis as percentages of the initial cost (100%).

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Introduction to Learning Curves

Let me introduce the learning curve effect by quoting directly from the Wikipedia:

“The rule used for representing the learning curve effect states that the more times a task has been performed, the less time will be required on each subsequent iteration. This relationship was probably first quantified in 1936 at Wright-Patterson Air Force Base in the United States, where it was determined that every time total aircraft production doubled, the required labour time decreased by 10 to 15 percent.” […]

“Learning curve theory states that as the quantity of items produced doubles, costs decrease at a predictable rate.”

I used the concept of learning curve in a blog post in which I discussed whether and when the Boeing 787 would break even. In that post I referred to Boeing’s target of reaching a 75% learning curve on the 787 program, much more difficult to reach than the 84% that Boeing reportedly achieved in the 777 program.

Why is a curve of 75% more difficult to achieve than a 84% curve? The meaning of the figure “84%” attached to the learning curve is that each time that the number of units produced is doubled, the cost is reduced in 16%, or the 2*nth unit cost is 84% of the unit cost of the nth unit. Thus, a 75% curve would imply that the cost is reduced in 25%, which is a higher cost reduction than 16%, and, thus, more difficult to achieve.

On the other hand, NASA, in its Learning Curve Calculator, offers some guidance on learning curves for different industries and mixes of hand labor and machining work:

  1. Aerospace 85%
  2. Shipbuilding 80-85%
  3. Complex machine tools for new models 75-85%
  4. Repetitive electronics manufacturing 90-95%
  5. Repetitive machining or punch-press operations 90-95%
  6. repetitive electrical operations 75-85%
  7. Repetitive welding operations 90%
  8. Raw materials 93-96%
  9. Purchased Parts 85-88%

How is the concept of learning curve calculated? (from Wikipedia: )

 Now the equation for the unit curve is given by:

Y_x = K x^{\log_2 (b)}

where

  • K is the number of direct labour hours to produce the first unit
  • Yx is the number of direct labour hours to produce the xth unit
  • x is the unit number
  • b is the learning percentage (expressed as a decimal)

How does a learning curve look like? (from Wikipedia) Actual examples of curves in both linear and logarithmic scales would be:

Experience curve (from Wikimedia, by Apdevries).

The concept of learning curve is indeed used in aerospace, however, coming back to the 787 program, Boeing does not disclose outright what is the actual learning curve it is achieving in its program. Nevertheless, in its investor relations conferences it provides information here and there of cost savings achieved, etc. This can be interpreted as derived from learning curve effects, and would permit to build a model, even if based on scarce information.

See some of the hints that Boeing provides:

“We continue to see progress in key operational performance indicators and unit costs, as we further implement production efficiencies and stabilize the overall production system on the 787 program. Unit cost has improved approximately 20% over the past year on the 787-8 […]”, Greg Smith, Boeing EVP – CFO at Q4 2013 Earnings Conference.

“[…] as we continue to make improvements 787 unit cost […]”Greg Smith, Boeing EVP – CFO at Q4 2013 Earnings Conference.

“when you look at flow-time, you look at unit cost at Charleston whether it’s final, mid, or (aft) it made great progress there. And the team has been very focused on continuing that progress going forward. We have experienced a higher number of jobs behind schedule in the mid-body section, and that’s really due to, if you think about it, you are introducing the Dash-9 at the same time going to 10 a month. […], we’ve applied additional resources. We know how to do this and we’ll get those jobs back to what we view as a more acceptable level. So we got mitigation plans.” Greg Smith, Boeing EVP – CFO at Q4 2013 Earnings Conference.

“This morning we announced plans to increase 787 production beyond the 10 per month we’re on track to achieve this year to 12 per month in 2016 and then 14 per month, before the end of the decade. […], capture productivity and learning improved profitability […]” Jim McNerney, Boeing Chairman, President and CEO at Q3 2013 Earnings Conference.

“We’ve added another line or sorry, a position within the line, where we’re doing the wing, body joint earlier in the process and this is through experience after 134 airplanes, the teams are really coming up with better ideas or improvements on how to increase flow and that’s going to require some upfront investment. But obviously in the units to come after we’ll see that improvement again in flow and productivity.” Greg Smith, Boeing EVP – CFO at Q3 2013 Earnings Conference.

“[…] the flow time reductions, we’ve had in our factories, the hours per unit, the productivity per whatever are increasing significantly on all of our programs.” Jim McNerney, Boeing Chairman, President and CEO at Q3 2013 Earnings Conference.

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