A Generalized Learning Curve Adapted for Purchasing and Cost Reduction Negotiations

This paper presents the use and validation of a generalized learning curve in the economies of scale purchasing experience. The model, based on Wright’s curve, incorporates two extra degrees of freedom to accommodate initial purchases of multiple (instead of single) units and a finite asymptotic price at high volumes. The study shows that each time the part purchase quantity is doubled, the price is reduced either by a constant percentage (a learning rate) or by an approach to an asymptotic plateau rate indicating a point of diminishing returns. Supplier price quotations at multiple purchase quantities were obtained for a pool of 17 critical parts. The data were fitted with the generalized learning curve by the method of least squares regression. The regressed learning rate, first unit price, and the asymptotic price can be used to infer supplier pricing strategies. Coupled with a “should-cost” analysis based on estimates of standard time and material, a system cost reduction task was carried out by the supply chain organization. 1. Introduction One of the challenges in a supply chain function is to carry out win-win negotiations with suppliers for part quality, cost, and delivery. Part quality is essential and should not be negotiable, provided that the specification is sound. A well-written specification with measurable attributes and well-defined statistical requirements will provide a precise quality foundation. Just-in-time (JIT) part delivery schedule would be ideal. However, some inventories of parts may help to ensure the continuity of supplies during abnormal circumstances. In the case of critical parts, the company may want to source them from more than one supplier. Tradeoff analysis must be conducted judiciously with multiple supplier sourcing strategy since it usually works against the part cost. Here is a brief description of a cost reduction strategy used in a fuel cell company. A Wright-based learning curve was used to determine the economic order quantity and to aid in the negotiation of the lowest possible, but fair, part price. A win-win negotiation strategy can build upon openness and trust. However, doing the homework upfront will go a long way in the negotiation process. Competitive benchmarking of suppliers is an important step to narrow down the list of potential suppliers. Should-cost analysis should be carried out on 20% of parts that make up 80% of the system cost. The analysis takes into account the production method, the amount of material used, the various processing times, and the estimated profits. While this analysis may