Efficient Frontier

Posted in Operations and Supply Chain Terms, Total Reads: 7023
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Definition: Efficient Frontier

Efficient frontier is a concept in operations that states that a company is ‘efficient’ if it has the highest perceived value for a given cost to deliver value of the company. Thus it indicates the operational efficiency of the company considering whether the company is a low-cost provider or a high-cost provider and how should it position itself as per their strategy.

A graphic representation of the efficient frontier can be shown as below,

Frontier Operations

The curve represents the efficient frontier. Companies 1 and 2 are on the efficient frontier even though company 1’s price is a lot higher than company 2. But both are operationally efficient. Company 3 is operationally inefficient as it lies below the curve. This indicates that the company 3 has higher price than its low cost competitors, and its perceived value is less than the higher prices competitors.

Thus company 3 will have to work for moving towards the efficient frontier and become operationally efficient.

 

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