Learning and process improvement during production ramp-up

Rapid product lifecycles and high development costs pressure manufacturing firms to cut not only their development times (time-to-market), but also th e time to reach full capacity utilization (time-to-volume). The period betw een completion of development and full capacity utilization is known as pro duction ramp-up. During that time, the new production process is ill unders tood, which causes low yields and low production rates, This paper analyzes the interactions among capacity utilization, yields, and process improveme nt (learning). We model learning in the form of deliberate experiments, whi ch reduce capacity in the short run. This creates a trade-off between exper iments and production. High selling prices during ramp-up raise the opportu nity cost of experiments, yet early learning is more valuable than later le arning. We formalize the resulting intertemporal trade-off between the shor t-term opportunity cost of capacity and the long term value of learning as a dynamic program. The paper also examines the tradeoff between production speed and yield/quality, where faster production rates lead to more defects . Finally, we show what happens if managers misunderstand the sources of le arning. (C) 2001 Elsevier Science B.V. All rights reserved.