Replies to post #334067 on Elite Pharmaceuticals Inc (ELTP)

[Gman24]

Elite adding a second shift to deal with all those headaches... too funny

[no2koolaid]

As it relates to extensive DD...Included in my chapter about competitive strategies is the following, which applies to Elite…

Taking advantage of the learning curve. The learning curve applies whenever the cost of accomplishing a business activity is reduced as a function of the cumulative times that function is engaged. The point behind the learning curve is that it is a way for companies to achieve a cost advantage over rivals.

The learning curve was first observed in the construction of aircraft in World War II, where research showed that the labor cost to build a plane fell by 20% each time the cumulative volume of production doubled. A similar pattern has been observed in other industries, including the manufacturing of computers, semi-conductors, paper manufacturing, and pharmaceuticals. Learning curve advantages are not exclusive to manufacturing. Learning can be associated with any business function, from purchasing raw materials to distribution and service. The essential fact is learning can be associated with any business function, from purchasing raw materials to distribution and service; with the result being the cost of performing an activity can decline over time as the learning and experience of company employees builds. In some circumstances where a firm has the greatest experience in manufacturing a product or providing a service, it will have the lowest costs in the industry and, thus, a cost advantage. The learning curve differs from economies of scale because it focuses on the relationship between cumulative volume of product and average unit costs. It also differs because there is no corresponding increase in costs as the volume grows; rather, costs will fall until they achieve the lowest costs technologically possible. For example, learning and experience economies stem from using the experience and suggestions of workers to install more efficient plant layouts, adding speed and effectiveness that accrues from repeated operations.

Doing a bit of translation…it means that, as they continue to deliver their new products to Lannett for sale, Elite’s learning curve will result in efficiencies that will drive down costs and lead to greater profitability. So, the operating costs which Elite reflects this year or in the next 2-3 quarters is likely to be higher than a year from now. Consequently, when lower costs are combined with increasing sales, the profit picture and Elite's future success are more obvious.