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 the time to reach full capacity utilization (time-to-volume). The period between completion of development and full capacity utilization is known as production ramp-up. During that time, the new production process is ill understood, which causes low yields and low production rates. This paper analyzes the interactions among capacity utilization, yields, and process improvement (learning). We model learning in the form of deliberate experiments, which reduce capacity in the short run. This creates a trade-off between experiments and production. High selling prices during ramp-up raise the opportunity cost of experiments, yet early learning is more valuable than later learning. We formalize the resulting intertemporal trade-off between the short-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 learning.