Measurement of Inflation for Unique and Long-Term Procurement Contracts: Defence Perspective

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Copyright: Tsang, Olivia Oi Yi
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Abstract
The Defence Materiel Organisation (DMO) procures goods and services on behalf of the Australian Department of Defence. Many high dollar value products are discrete, custom-made procurements. Moreover, the market from which these procurements are sought is also unique. This is because while DMO is a monopsonist, suppliers of complex combat systems often have characteristics of an oligopoly (sometimes even of a monopoly). The objective of this research is to develop a framework that would allow for the calculation of a ‘true’ defence-contract-relevant measure of inflation for price variation purposes in defence contracting. The current research investigates a ‘Three-Stage Modelling Strategy’. The first stage involves ‘selecting an appropriate index or indexes’ while the second stage requires ‘correcting the bias in the index’ and the third stage involves ‘index forecasting’. The current research also uses an illustrative example of the procurement of combat vehicles to demonstrate the implications of using such a model. Throughout the research, a comparative analysis between the Single Index (i.e. Finished Goods) approach and the Multiple Indexes (i.e. Cost Components) approach was conducted in order to compare the inflation generated under each. One of the important findings from the current research is that there would almost certainly be an understatement in inflation with indexes under the Single Index approach. As for the Multiple Indexes approach, the research found that the composite inflation generated by a collection of cost components indexes would almost undoubtedly be overstated if there was no consideration of productivity in the calculation. In response to these findings, the research introduced and discussed correcting adjustments to counteract these problems.
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Author(s)
Tsang, Olivia Oi Yi
Supervisor(s)
Cooper, Russel
Nicholls, Des
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Publication Year
2011
Resource Type
Thesis
Degree Type
Masters Thesis
UNSW Faculty
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