7 AAG 040 ARMY TROOP SUPPORT AND AVIATION MATERIEL READINESS CO-ETC F/ 5/3HISTORICAL NLATION PROGRAM. (A COMPUTER PROGRAM GENERATING HI-ETC(U)JAN 80 V H GILLE

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UNCLASSIFIED _____

SECURITY CLASSIFICATION OF THIS PAGE (Whsen DaIe Enttered)RE DI S UC ONREPORT DOCUMENTATION PAGE BFRE COMPLETINORM

1REPORT NUMBER 2. GOVT ACCESSION NO, 3. RECIPIENT'S CATALOG NUMBER

* ~~Historical Inflation Program* .TP FR!QTAPRO OEE(j/(A Computer Program Generating Historical le 411,j)bInflation Indices for Army Aircraft) o, p ft *.ppomr Qa" QR

AUTHR(-. S. CONTRACT OR GRANT NUMBEROs)

ID Warren Ho/Gille, Jrtp

9. PERFORMING ORGANIZATION NAME AND ADDRESS WO RORM ELEMENT, PROJECT, TASKUS Army Troo Support & Aviation Materiel ReadinesE AE OKUI UBRComman%, Office ol the Comptroller, Cost AnalysisDivisionafComponents & Operational Studies Branch4300 Goodfellow Blvd, St. Louis, MD 63120

11. CONTROLLING OFFICE NAME AND ADDRESS i.LafpefW TIE

11 Ja 8j.14UMBER 0$ PAGES-

77 pages14. MONITORING AGENCY NAME aADDRESS(If differnt from, Controlling Offie*) 15. SECURITY CLASS. (of tful. report)

UNCLASSIFIED15a. DECLASSI PIC ATION/ DOWNGRADING

SCHEDULE

* IS6. DISTRIBUTION STATEMENT (of tis Report)

Approvor ,.

17. DISTRIBUTION STATEMENT (of thm. abstract entered int Block 20, If different froi Repart)

III. SUPPLEMENTARY NOTES

19. KEY WORDS (Continue an reverse side It necesey and Identify by block number)Inflation (Economics), Indexes, Cost Analysis, Aircraft, Avionics, Airframe,

scribes the Historical Inflation Program, a computer program generatinghistorical inflation indices for Army aircraft. The program can be updatedmonthly, is easily revised for changes in Bureau of Labor Statistics methods,and is capable of handling data for all fiscal year formats. Output is express-.ed as monthly, quarterly, Fiscal Year, and Calendar Year inflation indices(in Calendar Year 1967 base) and inflation factors (in any Fiscal Year base)#This report contains updated tables of inflation factors, expressed in a FY 79

WP Un COEITION OF IMOV 611IS OUSOLETE UNCIASSIFIEC4I~,7 U.' j.

SIECURITY CLASIFICATION OF Th4t$ PAGE (11bn Dot. aner

USI i I I %.bpmr e.A I OWN %P I "t o AW|o ....

20. ABSTRACT.

base. These indices and factors provide a means of adjusting historical

4cost data for the procurement of Army Aircraft to constant year dollars.

Additional features include: computations for the Derivation of RevisedWeighting Factors, detailed indices enabling the adjustment of historical

Labor and Material cost separately, a discussion of aggregate weighting

factors for Labor and Materials, (including trends from sensitivity analysis

with more background materials), and additional documentation aimed at

making the report useful to a large cross section of the DOD/Rotary Wing

Aircraft Community.

Acces-sicO"', .'rNTIS G. - LDDC TAB LUjiistilli. ion_-

Dist

SECuRITY CLASSIFICATION OF THIS PAOGEIen Doe RnISed)

DISCLAIMER STATEMENT

Sviews, opinions, and/or findings contained in this report.ze viose of the autnor(s) and should not be construed as anofficial Department of the Army' position, policy, or decisionuZ.less so designated by other documentation.

-4

-4I

ACKNOWLEDGEMENTS

The author extends his appreciation to the Kansas CityRegional Office of the Bureau of Labor Statistics, U.S.Department of Labor, for special assistance with wage and

--, price data.

Credit is due Mr. Ralph Lilge, USAAVRADCOM, who played aprimary role in automating the Historical Inflation Programin 1975.

Ms. Marva Campbell, and Ms. Paula Smith provided excellentclerical support in the revision of this paper.

t

- i

TABLE OF CONTENTS

PAGES

I. APPLICABILITY 1

II. OVERVIEW OF HISTORICAL INFLATION PROGRAM 2-8A. History 2B. Construction of Indices - Methodology 3C. Indexing Techniques 4D. Weighting Factors 4E. Data 5F. Validity and Firmness of Data 5G. Particular Problems 6H. Change in Content from the Previous Report 8

III. DATA CONCERNING THE MATERIAL CONTENT OF U.S.ARMY HELICOPTER SYSTEMS 9-14

IV. ANALYSIS: (TECHNICAL SECTION) 15-23A. Chronology 15-17

1. Characteristics of the RAND Report 152. Characteristics of the September 1973 16

Cost Research Report3. Characteristics of the August 1974 17

Cost Research ReportB. Data Sources 18C. Methodology 18-23

1. Overhead and Productivity Adjustments 182. Revision of Weighting Factors 193. Construction of Indices 20

V. SENSITIVITY ANALYSIS FOR AIRCRAFT AIRFRAME 25

VI. DESCRIPTION OF COMPUTER PROGRAM 28

VII. REFERENCES 29

VIII. BIBLIOGRAPHY 30

APPENDIX A: Computations for the Derivation of A-iRevised Weighting Factors for theHistorical Inflation Program

APPENDIX B: Producer Price Indexes and Earnings B-iSeries Used in Historical InflationProgram

TABLE OF CONTENTS

PAGE (s)

APPENDIX C: Historical Flow of Producer Price C-iIndexes and Earnings Series Used inHistorical Inflation Program withRevised Weighting Factors

APPENDIX D: Annual Data for Historical Inflation D-1Program

APPENDIX E: Monthly Data for Historical Inflation E-IProgram

APPENDIX F: Historical Inflation Indices F-1APPENDIX G: Annual Data for Historical Inflation G-I

Program, Raw Material Portion OnlyAPPENDIX H: Monthly Data for Historical Inflation H-i

Program, Raw Material Portion OnlyAPPENDIX I: Historical Inflation Indices, Raw I-i

Material Portion Only

I. APPLICABILITY. The inflation indices and factors published

in this report are applicable to the adjustment of historical

costs for the procurement of Army aircraft. These costs are

currently funded by the Aircraft Procurement, Army and Other

Procurement Army appropriations.

,J1

II. AN OVERVIEW OF THE HISTORICAL INFLATION PROGRAM.

A. History.

The Historical Inflation Program for Army aircraft

procurement was developed using a sequence of documents, the

first being Aerospace Price Indices, by H.G. Campbell (RAND #

R-568-PR, 12/70). Essentially, the RAND document established

a basis for the construction of general indices, identified items

of special interest and concern, and indicated that no substitute

exists for thorough analysis of the specific items being

characterized by an historical index. Several indices, designed

specifically for rotary wing aircraft, have been developed for

the adjustment of procurement cost since that time by the United

States Army Aviation Systems Command, and this function has

• been carried over to the Components and Operational Studies

Branch, Cost Analysis Division, Office of the Comptroller,

USATSARCOM.

The current indices are based on research done in the period

1972 to date. In July 1973, the Office of the Comptroller, Cost

Analys-s Division, made a study of materials used in the Army

helicopter systems then, or most recently, in production. Cost

Information Reports were assembled, and contractors were asked

to supply lists of materials for both airframe and engine, on the

basis of contribution to weight. Contractor technical and en-

gineering personnel provided assistance with data interpretation

and definitions for items whose composition was unclear

from engineering documents and Detailed Weight Statements.

2

The following aircraft were selected:

UH-lH OH-6A AH-lGCH-47C OH-58A CH-54B

This selection of aircraft is deemed typical for several

reasons. First, the six helicopter systems listed above make

up the majority of the U.S. Army Air Order of Battle listed in

Section III. Second, a number of these aircraft had been produced

on a long term, continuing basis in previous versions. And,

third, and most important, they are among the systems most likely

to be used in developing Cost Estimating Relationships for new

systems by use of parametric techniques.

The September 1973 Historical Inflation Cost Research Report,

cited in the references, was the first report to make full use of

this information. It was updated by the August 1974 Cost Research

4Report, and then by a series of expanded analyses under current

*title, Historical Inflation Program, since that time. A list of

the assumptions and changes in methodology over the period

referenced are included in the body of the Technical Section.

B. Construction of Indices - Methodology.

The indices are developed by a stepwise, building process,

which computes the contributions to cost on a weighted value-

added basis.

1. First, the contribution to cost of small parts and other

purchased equipment is calculated.

2. Next, the cost contribution of purchased parts is combined

with that of raw materials to get the cost of purchased materials.

3

3. Purchased material cost is then combined with contractor

~aocr cost tz compute the index for products such as engine or

-:c fram e

4. The indices for engine, airframe, and avionics are

comznedto get an overall index for aggregate aircraft.

Theproedue uedis "Cost-Weighting". The information

.rc"-ntages L~ased on wih.Bcueheindices ue o -a-

-:-acrial costs are based on monetary conside rations (~.

Iroaucer Price In4Lex; Wages, by Standard Industriol& Code), 2er-

-entages by weight had to be transformed into percent&age con.-

trz:.'utions to cost, if PPI and SIC inflation factors were to be

al drectly. Based on the premise of profit maximozatior-,

-ontractors should tend to mnirimize the use of expensive materials

* ~ ~ ct to ~ana::gacceptable perforr.,ance standards, eSSen-

Z a rnater:a.s w--zn- a high cost per: unit weoLgh- ratlon would!"

-~ ~ aro~c~.st~c.,a -,ercentage based on weiSght using3

- .. ~..tar ~ o rot o. r esu.it onan ir-roe ndex

-z,.a.Ll a~ on-if o~.onn eibLoty. The latter

c o: . -voided by calcul,;tIng the contrlbutoocn to cost, instead

L_ rne contributlor. to weight.

S. z~ton "ac-cors. A.Ithough the model. is Cdeveloped by an

~'~&:~,st_ pwise -process, the revo-sed weighting factors in

(al at t.-e end of- Appendix B) implicitly -include a!-l

ca-;-ations. The index, as stated, is merely tne direct sum of

4

~rocctsof the weights and their corresponding material

.~e v~.us. The development of weighting factors is illustrated

::e Tecrnnical Section.

-. "he data used appear 2n two different forms. Yearly

pesented by Calendar Year 1947 to date , and mon~thly

fzr ~.:..yearly data, pre 1958, are condensed

* ~ courns; th aafor 1958 and !ater are presented ~

for zrmat - 14 columns for mater:.al inputs, and 4 for

..~o::. Be;inning w~th report 76-1B, all columns of the data set

~ee .dntiiedby PPI and SIC code, as well as a verhal

ae-:.it46or in the column heading. PLEASE NOTE: The data, their

~a:~terzatonand any redefinition, by the Bureau of Labor

zt~z~,D rer the years, are tracked in line diagram C-2.

-. -lidity and Firmness of Data.

Z: roducer Pri*ce index and Wage Zdata was suprplied by the

'-,'y :;ora Off'ce of the BEu:reau of Labor Stat-stics,I

.~rmet o Lbor he daza comes in tnree types o

~ ror~n: (1 a cumuluative history coverin; all relevant

*~tyea:rs on a zo.:n D asis. 2,A yearly edi-zion 'such as

P z~ rice index An:.ual 5uppLe:mLen-- which lists the previous

onz-s and '3' monthly publications whicn List thLe most

~: :7.onth and several other months 'or comparison.

d' a t a t o r.;e m, r" it - -usr be at least A8 months old, in

z.~ ecause it b, -ench:marked and zad-usted after the fact.

zr eam ,~ z~~ samples are taker. throughout the year; however,

3nmo -. ntA.(:~ e:.:l.t, a m;uc:. more comprehensive

~-peis takena. Due to its significantly larger sample size,

th~e zenchmark month's sample is felt to be more representative

t.-ose of oth.-er individual months, and if the benchmark

z.i.eraes :from the pattern, the other months are adjusted propor-

~~ to con~form to its base as benchmark.

* * t2e data in the cumulative history "type" publi-cation is felt

f=r or "final". Basically, such publications provide a

onoogiallisting of all firm data available for the past

tory of those indices. However, the data in such publications

_usually 18 to 24 months behind the current period. The data

each month listed in the Annual Supplements i_- not necessarily

... * irrn because benchmarks occur during the Calendar Year, and at

._;_:ferent times for different series. Adjustments may not have

been made before the Annual Supplements are published. The

Szublicataons, whichn contain nZforzmatlon on, -ie most current

p~o~,are even more tentative. :n general, the _-ro&Jcer Price

.xData are f:rm Defore Wage Indices for tc crrces-:ponding

pDrobaholy due tc th,-e fact thnat -it is eazrto define and

~srepr:.ce chaanges for commoditi.es t-han. for h-man sk'lls.

1. The Wage Data for thne period CY 1971-CY 1973 changed,

:~:ycases, diuring *C'Y 75-FY 76. The wage-prace freeze

owocer-.ain 6- lary &a' wage increases, Lbut a number of these

" wazo c_ : a retroactive 6asis based on lea~al ecisions

a~r t'ers after tn-e fact. Because such payments

;=L. _o_-.3-t c attr;-buta ble to labor services during the

period, these payments had to be incorporated in the indices to

provide an accurate measure of labor earnings.*

2. With the September 1978 issue of Employment and Earnings,

the reporting categories for a number of types of production

labor were changed. In effect, the 1967 Standard Industrial

Classification Code has been supplanted by the 1972 SIC Code.

The Changes are as follows:

SIC Code & Title -to- SIC Code & Title

3674,9 Electronic 367X Electronic Com-Devices & ponents and Access-Components ories

3722 Aircraft Engines 3724 Aircraft Enginesand Engine Parts and Engine Parts

723,9 Aircraft Parts 3728 Aircraft Equipmentand Equipment

" The reclassification had little or no inpact on this study

Lo the essential similarities, by definition, of the old and

new Labor categories.

1. Potential discrepanc:.es in the data set were eliminated hy

com. ring data elements with the most recent data on microfiche

,r zna 14 mazerial and 4 labor categories used in the report.

-"I data were verified to be the latest and most accurate

.vailabIe, on 20 January 1979.

WEe ELS Bullet_;. No. 1312-10, Employment and Earnings 1909-75-or a detailed explanation (esp. p. 769).

7

.az;. in Content from the Previous Reports.

A pr-tout of the computer program used for the Historical

- zion. Procram is not included in this report, for two reasons.

-; was found that a list of structural equations would

De-uer serve the purpose of elucidating the model. At the same

St.:e, with the reduced form equations and clearly identifiable

Ea ts, any index figure can be checked by direct calculation

-;ee Azpend : =, page B-4). Second, direct duplication of the

- from the original is more accurate and efficient than

., ,ypuncning copies from the program source listings, should such

ne-x-ernal need ever develop.

sensitivity analysis, which displays the effects resulting

fror a change in the relative weights of labor and material in

. :He Historical index, has been included in this revision. The

3ercentage contribution to cost attributable to labor and materials

vae.ia anong aircraft systems, and the values used in this report--

.7 materia's) and .622 (labor)--are an average for the six

systezs referenced. The sensitivity analysis yields a measure of the

e-zent to which the index for a single aircraft system would vary,

.:az system is built with an aggregate labor/material mix which

ifaers fro. the six system average. The accuracy of the re-

weighzed index, however, also requires that the other assumptions

L- well satisfied, i.e., the 14 material and 4 lazor indices are

typ;cal of the system being reviewed. Because such weighting is

a co.ncern in developing estimates in inflated dollars, the effect

such "weighting changes" should be of significant interest to

man- readers.0

DATA CONCRN~ING:

Ti-.e Material Content of U.S. Army Helicopter Systems

- jS-lG "COBRA"

"nwhg

a-54B "s&TYCJ.

Air Order of Battle

United States Army - Quantities and Types of Aircraft

ROTARY WING AIRCRAFT

Systae.- Popular Approx No. of Percent3es:.a~on Name 2.r,,ptv Wt. Aircraft of Fleet

"COBRA" 5,800 lbs. 800

"HUEY" 5,100 lbs. 4,200 53.2%

3H-6 "CAYUSE" 1,200 lbs. 450 5.7%

OH-5o "KIOTW-A 1,750 lbs. i,900 24. 1,

- CO 9,500 lbs. 430 5.5%

"SKYCRANE" 19, 800 lbs. 75 i.0%

"aLACK HAWK" 10,500 lbs. 29 .3%

Ah-4A "ADV. A TACK" 10,400 lbs. 0 0%

7,884 100. 051

3o : FM 101.-20 (UNCLASSIFIED).World Combat Aircraft DirectoryDoubleday and Co.,

1I

010,

- *0,

* 0 -

-- ** .

- o.

* ~4 .44.0va~ ~ U 0

0. i- I. -. Vo 0. 1-10.

-a 3. 06 Cc

-0 06 -

R, -0 SOS&-9L 4 t-12

wAtert.. ,mpoettlon Anayfts

of Army Hehlcocers(Dated Jily ] '

material (Pounds,

U.S. Arm, -elico~ters.

"ii"-. - . , . I Ntckume1i

-10e. .11Lb A.UM.&fl St.~t. flAS6461UN T1 bni±f COPPer' bra .ronz, 1*&4Tngtn Alloy K14efl3ac

,e-. 5.3946;1.88 1 ,76 216 108 93 0. 0 216 0 Q 593

.,P-. 6,973, 1.579 1.718 : 280 70 600 100 0 100 0 0 726

jb-6A 1..63' 666 218 46 30 23: 3 0 1 25. ISO

Ai- .566 536 U3 55 15 1. 0' 0 43 0 0 293

ZA-.2Z 6, 312 7,9891 1,306 63 676 4 16 0 45 0 2074

U. 6 o,931 3,860. 72 970 516 20 23 2 0 788 40,

U.S. Army Turbine Engines.

DryI I ckll StAinless Steel

%4 W eight I Aluminm J Steel agnesiUm itan Lm Copper Alloy MoNsckllc Steel Alloy

1-. 1 79 31b 60 26 3 0 23 C 0

763-A-A 138 1 106 16 0 0 0

T--O£ .38 0108 26 0 0 3 L 0

• " 590 0 53£ so 20 1* 0 0 0 0

T9.-6-.- 1 0 0 290 0 596 94

.z. Arv ne copter Airframe, Only.

X,'av Weight' A Iusntm 1 trel MA rne I uo. iTitnium Copper hrasA hronze LeAd Tufngsten Alloy 1 O0kc1ic

M-IG 4.861 1.809 ,.461. 136 82 590 0 0 216 0 0 570

L11-lH 4.46 1,500 1,.2 200 44 600 100 0 100 0 0 700

o0-6A 1.025 666 109 20 1 V) 23 3 C 25 167

Oh-l~A 1,448 536 4341 29 15 101 0 0 43 0 0 290

CR-47C 19,303 8,312 6,969 1,204 23 656 4 16 0 45 0 2,072

CH-53 17,803 0.928 2,460 72 970 516 20 23 1 1 0 209 4,. M

13

TABLE 3

S5;YMIARY OF AIRFBA.4E AND ENGINE CIR DATA*

(1) (2)Airframe Engine

62.08% 40.a5%

~ ~37.-2% 59.__Z

100. 0% 100.0%

A :a::a1 41. 88 70.56%

.a ument 58.12% 29.42%

100.00% l0.030%

Arframe factors were obtained from a sample of 15 CIR

z:or ts representing the AH-1, CH-47, CH-54, OH-6, and OH-58

a:.rcraft systems.

'2) -ngine factors were obtained from a sample of 14 CIR

r-ports re-presenting 11 different turbine engine configurations

procured from Lycoming, Allison, General Electric, and Pratt & Wnitney.

-As adjusted by Labor and Material price movements.

3*o -:. :STORICAL IYFLATION INDICES FOR ARMY AIRCRAFT

U.S. rmy Aviation Systems Command, St. Louis, 1974,. 4.

14

T EC H NIC AL SE C T 10N

15

"- XSIS: (TECHNICAL SECTION).

A. :rooogy. Previous efforts related to the development of

. _on c iniices include Aerospace Price indexes by H.G. Campbell,

. ;orporation, December 1970 'Reference 1 and two Cost Research

Ae~oz xistorical Inflation indices for Army Aircrafr * Cost

AAalysas Division, Office of the Comptroller, US Army Aviation

ystezs C.~znmand, September 1973 (Reference 4), and Historical

..r.aticn :ndices for Army Aircraft, Cost Analysis Division,

ffi ce of the Comptroller, US Army Aviation Systems Conmand,

Z-.gusz 1974 (Reference 5).

-. Characteristics of the RAND Report.

a. Specific Producer Prices and Price indexes (Reference 8)

and -::oyment and Earnings (Reference 2) data have been selected

as roxy series for similar commodity and labor categories

expe:ienced in the procurement of Army aircraft. Aircraft inflation

-ndices are constructed from a weighted average of the6e proxy

series. The weightang factors for thns average are derived from

estimates of the relative contribution to the total aircraft

.o made by each component (commodity or industry labor group)

cc:.prsing the Lndex. The index is thus a "cost-weighted" series.

A 2 percent compounded annual rate for growth of

ove,:.eaQ ratios is assumed.

C. No adjustment is made for productivity increases.

d. indices are developed on a Calendar Year basis.

-. C:araczerisrcs :f the Septei er 1973 Cost Research Report.

.0

a. As with the RAND Report, aircraft inflation indices

'ave teen constructed from a weighted average of Producer Prices

.an-d Price Index:s and Employment and Earnings data selected as

proxy seres for their similarity to those commodities and labor

cazegcories experienced in the procurement of Army aircraft.

Weighz n9factors are proportional to the relative physi.cai

wehrAts or nasses, rather than the relative costs \as in the

.A /A Report), of commodities comprising the "composite material"portion of the index. Thus, the "composite material" portion of

zhe index ze-resents a "weight-weighted" series.

like the RAND Report, a 2 percent annual growth _n the

overhead ratio is assumed.

c. No adjustment is made for productivity increases.

-. Indices are developed on a Calendar Year basis.

e. For years for which certain specified Producer Price

_naexes were unavailable, data has been projected from adjacent

years.

3. Characteristics of thhe August 1974 Research Report.

a. As before, Producer Prices and Price Indexes and

~.lo.'z.. and Earnings data have been selected as proxy series

.:. . ,ar to those commodities and labor categories experienced

:r z.e procurement of Army aircraft. The indices have been

ced from a weighted average of these proxy series

i the weighting factors used irn the September 1973 Cost

Aesearch eport. The "composite material" portoon of the index

rc-zasents a "weight-weighted" series.

s7

b. Unlike RAND and the September 1973 Cost Research Report,

no adjustment for overhead growth is assumed.

c. LNo adjustment for productivity increases is assumed.

Indices have bee;. extended to FY 1974 by assuminS that data

for the September 1973 Cost Research Report represented December

and hence the Fiscal Year midpoint, rather than the annual average,

o each calendar year.

. For years for which certain specified Producer Price

.,7.exes were unavailable, data has been projected from adjacent

B. L Sources. Data sources for this report are Producer Prices

and Price Indexes (reference 8) and Employmenz and Earnings

'reference 2). To insure that the latest revisions were incor-

porated into the data base, data was obtained from the Bureau

of Labor Statistics Information Center, and Annual Supplements to<I

,ne -roducer Prices and Price Indexes. For Zin-. and

ZarningL, ata tor any given nonth was obtained from the latest

avaa:bLe source. Data us d in tns report are displayed in

Acpendaces D, E. G, and h.

C. Methodology.

_veri-ead anf Producrmvizv Ad- srmenis. On the basis of data

cover:ng a ten year perlod, the RAND Repcrt concluded that there

secular growth trend of 2 , percent per year in the

_c cn overheaa rate. The report also concludes that there

....en Litzle, if any, improvement in productivity to counteract

c: o~served trnfl an overhead growth. This conclusion appears to

betrwarranted, particularly in light of productivity gains

recorded (as measured by Industrial Production Indices) for

similar sectors of industry. Thus, in order not to unduly

Las .h results of the analysis, this report makes no

ad-stment for either overheaa growth or improvements in

:.roduc-_ivity.

2. Revision of Weighting Factors. From a number of Cost

;:forn:ation Reports, the following weighting factors were

ieveloped and reported in the September 1973 Cost Research

Retort. For the Airframe:

. Raw Material + (.622) Labor 3723,9 (3728)=?urchased Equipment

*.582, P-rchased Equipment + (.418) Raw Material

Total Material

.378) Total Material + (.622) Labor 3721 = Total Airframe

So. zne Engine:

.59) Raw Material t (.401) Labor 3723,9 (3728)Purchased Equipment

.295) Purchased Equipment + (.705) Raw Material= Total Material

.S ) Total Mater-al + (.401, Labor 3722 (3724)

Total Engines

An. zor Avionics:

.i Material + .685) Labor 3674,9 (367x) = Total Avionics

-::.9reviousiy published ind-cet, the weighting factors used

to zevelop the material portion of th±e indices were made

propcronal to the relative physical weights of the various

co~r,:.oaates used in the construczion of the aircraft. The

.7 eriaI poruzon oi hnse indices thus represent a "weight-

series. in order to be consistent with the intenced

- inflation index, the methodolocy in this progra

_== rex weig rng ractorsproortona. tc the .u:erlcal

.._ob e frrz mtiplyig the rela-ve -:ysicai

Wi::.aly weyght Z' te appropriate base year co=t -er :o-nd.

_-= a zst-weined" index giving more weight to such

cozmooizies &s titaniL. Unfortunately, however,

S e Lound 'ata are not published in Producer Prices and

- -xCs for each of zne commodities used in construct-rng

e To overcome his difficulty, the per pound przce

t ztd from the available data of the most close!-,

C,-, Co oites. zo minimize the effect from related

rl wn.c -have relatively little economic impact, each

--- pound estimate has been developed from a weighted

D a; of available data utiizing the Bureau of -abor

- 19"5 revised relative weights published 'n tne

l Supplement to Producer (Formerly Wholesale) Prices

2rce indexes. The available data then constitutes a weighted

. from which a surrogate price per pound :s computed

S tna 2roducer Price series in question. See Appendix A

Computazions for z e Derivat.on of these Revised

.:- -ors, alon with their associated cost contribution

a. Ca:en.r Year -96? has been take., as the base of these

in ' ecause this year rep:esents the approximate midpoint of

2riod (1958-1978, for which the data supports the develop-

- c: t. idices, including those which.- acccu.t for

.~v-:.:.c -,.zthermnore, 1967 conforms to the base used by the

labo SzatiLst--cs -rr Producer P::ice Indexes.

L. kppendix 3 contains the current Producer Price Irndex

Z~s *anngs series, and the associated weighting factors

the cons-cru,;ctio. of the indices --ubllshed in this report.

-:c-r~ cf :.ese seri-es have beens L existence t~or cnl.y a

~e, che c~oe~~re.Late-i ser .es nave been substituted

* -~ iate .athematical adjiustets to insure continuity of

~:.ices. This technizLue is con~sidered preferable to the

~ ~data by pro-ect:.on from ad-acent years. A-Dpenci-x

;.-Zcts tne -'.-;,.l fow and iLdentifies the effecti-ve dates

cof £ei; conversions, for tche Producer Price 1rndex and Earn~ings

data used --r the development of the indices published in this report.

c. The zerim "aggregate" has been selected to i-ndicate

~ indices applicable to the combined Airframe and EngiJr.e

~~ae ir Ven'-icle Excuding Avionics) and- to the com~bined

- --. ngie, nd, Avionics (AgSre; ,te Air Veh:.c-e In~cluding

z&-c o avoid confusilon w-,t'.. tc.xe -cer-- "co-.-poslte' as in

Sescalc;.icr. ::d-ces". Aggrecate~ iLndices are based

~aa -2-~weic'. :.- zee Rezerence 6, of the

&cneana "v-,onic6 :dcs:ec.vy

-~e~at :LCes ar rternde6 for tche ad-ustment of 1nistorical

a--a for wcnthe d--.-trihutzion of costs for the Airframe,

- ~ ~.dAviLonics com.ponents is unavailable.

z- new z;ecz:.on depicting the raw material portion of

thn- int~ation indices is published as Appendix I. it is intended

fIor az-ppli.cations requiring greater accuracy. Appropriate labor

..cscan be o Dtained from the Bureau of Labor StatiLstics

Employment and Earnings series (Reference 2) as follows:

1967 1972

Labor Category SIC Code SIC Code industry

A.-.r::zrme Contractor 3721 3721 Aircraft

irrreSubcon-tractor 3723,9 3728 Other aircraftpart & equipment

aContractor 3722 3724 Aircraft engines& engine parts

meSubcontractor 3723,9 3728 Other aircraftparts & equipment

--vlonlcs 3674,9 367X other electroniccomponents

Aqgregate Ai-r Vehicle 372 372 Aircraft andixl igAvionics parts

e. The bDasic Computational Yethodoloav is-as follows

:)For Com?onen~ Airframre, Eng-ne. and iorncs.

aj Calendar Year indiLces are computed using sumn of wei.ghted

cal.-enaar year labor and material iLndices.

~iscal Year indices are computed Inr a ri.anner similar

to Za.e-.-dar Year, btthe yearLy fiscal averages are generated

frz,; th-e -..or,th:y data.

'C.' Quarterly indices are compu,:ted by averaging three months

data fromr the monthly data set.

,,.Lo.-th:.y Indices are computed by direct calculation using

...:..:.Ly data. itz is a weighted average or monthly figures

u sing the sare methodology as in computing the Calendar

22

mop-

Year Indices.

For additional information, see Appendix B.

2' Aircraft System Cost

The inflation indices for "Aggregate Vehicle" and

Aggregate Vehicle without Avionics" are produce Dy

combining the three separate indices:

.Dr.onent Relative Weight

Airframe Index 70%

Engine Index 20%

Avionics Index 10%

Aggregate Vehicle 100%

Relative Weight

4 Component w/o Avionics

Airframe Index 78%

Engine Index 22%

Aggregate Vehicle 100%without Avionics

b. Reduced form equations are displayed in Appendix B, page

(.7) (.2 + .7) = .78.2) - .2 + .7) = .22

23

V. DESCRIPTION OF COMPUTER PROGRAM AND ASSOCIATED APPENDICES.

The Hz-storical Inflation Program is a computer program used to

generate historical inflation indices for Army aircraft and their

za~or subsystems. Appendices D and G contain the annual data

uEi by the program, while the monthly data, commencing July 1967,

are in Appendices E and H. Producer Price Index and Earnings

data in these Appendices have been arrayed into columns with

the same numerical code sequence used in Appendix B. Historical

.nflation indices and factors are published in Appendix F.

Fiscal Year, quarterly, and monthly indices have been developed

from the appropriate monthly data. A section containing the

raw material portion only of these indices is published as

*Appendix I. The labor portion of these indices may be obtained

by applying the methodology described in paragraph III.C.3 d,

to the data contained in Appendices D and E.

24

V ;. S:S:TIVITY ANALYSIS

Many considerations are important when constructing Historical

.nr.ces for tracking purposes. These certainly include the

a. 1he nature of the items chosen to comprise tae index.

(1, How typical or representative the items are.

(2) How closely the proxy items approximate the actual items,

if indices for the actual items are not obtainable.

(3) The number of items used, and the detail in the analysis

*- which produced the indices.

b. The determination of the percent contribution to cost -

* "Cost Drivers".

C. The weighting factors employed in the overall analysis.

A difficult problem confronting cost analysts, who must

determine the validity of an historical index for tracking purposes,

relates to aggregate labor/material weighting factors. in

t:acking major weapons systems, the ratio is often stated as

say 40/63 - that is 40 percent material and 60 percent labor -

as contributions to cost. Because it is difficult for

:.---s-s to determine the "correct" aggregate mix of labor and

.azer~a1 , being external to the project, the aggregate split is

certainly of interest.

25

The value for any index depends on three factors:

a. The number of factors employed, and the quality and depth

of the analysis.

b. The values for each component of cost used in the

construction of the index.

c. The weights, or levels of importance, given to the

factors, individually and collectively.

*The ob3ective of this sensitivity analysis is to shed some

ght on the way in which the aggregate labor/material split

affects zhe index, which has been a controversial issue for some

:ame. Using a set of recursive linear equations, the effect on

a *ne historical inflation index, for airframe resulting from

varying the aggregate weighting scheme was calculated, in both raw

and percentage terms. The calculations were made using a Wang

system 2230 minicomputer, and a sample printout follows. The

results provide evidence that the key to a successful index resides

an item (1), the number of factors employed, and the quality and

the analysis used in preparing the index. Because wages

are often tied to the Producer Price index, or other price indices,

Iaor agreements, it is not surprising that aggregate weighting

;e:cenza~es for labor and material might not be an extremely

sa.-ns ve issue. However, the calcalations provide strong support

26

for the position that the ider.tification of cost components and

the depth and quality of detail in an analysis are of paramount

importance, when developing an index to be used in controlling

the cost of a major weapon system.

I.

27

E N .S I I I v I 1 Y FA N A I_ ' S I _

S;NS _5TI V I TY OF AIP FRPME INDL->: 'TO I :HN(jES-, IN ui..-ROS WEIGHrINU FACfOR-S

CALENDAR YEAR 1978

f_.S' FIUE PU..RE NEW C:1i, PERLEN-

fATL LABOR MATL L AE:.jBt- I N[X INE:X CHHNGE

170 6220. 241:1. 7b,88 2. 1471 -. 1470 0. 00

.L. 7000 1777 t2 . :59 Z 1470 . 4 1

....... ... 2. 7. 4 74 2 50. 2, 14,

41"0 ;00201 . 91 1 14 2. 1470 Li. 12

..O 5500 2.105J99 2. 1470 -. 41

500 400 .05. 59o 2 0 a 14W --. .f

4,-,.,....5 00 460;15'4 5<4 ,,_,. 2. lia8l 5 147 -u 1. 4 2

-:tow, .. i -4. 00"2.

2000- Alt. - 14

-. L,-, . |- *.":-,-.z.'.- '.4 ,'-. : i -'-

: _..,] 6H . 5.' ... :.i1.i -' .4,"'_i - 1 1.

-. ; * _. _, * f1t.. ..... ..... . .. i ;: -

•-_ .... : ':' - -41 9 . ,J : J 14F: ,-

26

VII. REFERENCES.

1. Campbell, H.G., Aerospace Price Indexes. Santa Monica,CA: The RAND Corporation, R-568-PR, December 1970.

2. Employment and Earnings. Washington, DC: US Departmentof Labor, Bureau of Labor Statistics

. Field Manual 101-20, Army Aviation Planning Manual,Washington D.C.: Headquarters, Dept of the Army,January 1979.

4. Historical inflation Indices for Army Aircraft.St. Louis, MO: US Army Aviation Systems Command, Officeof the Comptroller, Cost Analysis Division, September 1973.

5. Historical Inflation Indices for Army Aircraft.St. Louis, MO: US Army Aviation Systems Command, Officeof the Comptroller, Cost Analysis Division, August 1974.

6. Letter, subject: Historical Cost Inflation indices forArmny Hardware and R&D Costs. Washington, DC: US ArmyY-ateriel Command, 26 October 1972

7. Memorandum, subject: Material Composition Analysis of USArmy Helicopters. St. Louis, MO: US Army Aviation SystemsCommand, ffi of the Comptroller, Cost Analysis Division,31 July 1973.

8. Producer Prices and Price Indexes. Washington, DC: USDepartment of Labor, Bureau of Labor Statistics.

9. World Combat Aircraft Directory. Garden City, NY:Doubleday and Company, Inc., 1976.

29

-I." Lidn, James E., Price arnd Welfare Theory.'4ew York, N4Y: McGraw-Hill Book Company, 1D69.

Thenat~o2 Financial Statist.'L. Washington, DC::nternazional Monetary Fund, Monthly.

t er, sub-ect: Inflation Guidance. Alexandria, VA::'aterie! Development & Readiness Cornand,

Of' i c _ - the Comptroller, Cost Analysis Division,7M~ay 1979.

Ler suzabject: :rif htio Gui~n~ A exadria, VA:A=- Za-cerie.L Development & Read-iness Command,

GC.f'Lco- Of the Comptroller, Cost Analysis Division,17 Seotember 1979.

* ~ PriCe Chances of Ez~cr xpenditures.~~~gto.,DO: US Department of Commerce, Bureau

o--: Zconomic Analysis, June 1975.

______ _____ (q. _

APPENDIX ACOMPUTATIONS FOR THE DERIVATION

OF REVI-LSED WEIGHTING I ACTORS

flOR THE HISTORICAL INFLATION PROGRAM

A L

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I

APPENDIX B

W!HOLESALE PRICE INDEXES AND EARNINGS SER;ES

-. "USED IN

HISTORICAL INFLATION PROGRAM

WITH REVISED WEIGHTING FACTORS

B1

*1~~0 C

CD o0

tn o' M uriH r-iLn~ V C

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I,

V

APPENDIX C

HISTORICAL FLOW OF WHOLESALE PRICE INDEXES AND

EARNINGS SERIES USED IN HISTORICAL INFLATION

PROGRAM WITH REVISED WEIGHTING FACTORS

I- 1

kC

- -

.4 41

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14 (A.4 t4

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APPENDIXD

*~NULDATA FOR TiiE hISTORILCAL iNFTI O RA FOR ..

AWY ROTARY WING AiRcRAFT

-z- m-

.

-- --- - - - I

- -

c6 -e 12N '

to in In' -4D4 oo%

APPEiT~IX E'

YCNTHLY DATA FOR THE i1ISTORICAL 'i-NFLATION PROGR~AM

Z . C)C 1CT 2 -01C ,3 ,C ,a 1 a

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A P PEN D IX F

HISTORICL INFLATION INDICES

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fF

~~48

" -. . . . _ ... N I, .t ~C . . . . .. ..

APPENDIX G

ANNuAL DATA FOR THE HISTORICAL INFLATION PROGRAM--

RAW MATERIAL PORTION ONJLY

G I

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