Why Find Demand Frontiers?
In the last few posts, we’ve been examining Demand Frontiers. You might ask, “What is the point of doing that?”
Well, let’s look.
Recall in the last post, we found the Demand Frontier moved little in 20 years. In 2016, the Demand Frontier had an equation describing the line running from the upper left to the lower right in the diagram below. Because the programs forming this line clustered closely about it, the standard deviation of the line is relatively low: $25.5 million.
The United States Air Force proposes to build 100 B-21 bombers at a “projected average procurement unit cost of $550 million per plane in FY2010 (https://lnkd.in/g4Rkx2R or $610M per plane in 2016 dollars. What are their chances of making that number of planes at that price, given the standard deviation of the Demand Frontier?
As shown below, the B-21 Target is nine standard deviations over the predicted limiting price ($380M) for the B-21. Examined by another metric, the historical maximum percentage deviation over the Demand Frontier was 17.8%. The B-21 program proposes to exceed it by 60.5%.
What was the procurement history of other programs that tried to exceed the Demand Frontier? We will find out next time.
