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Performance Evaluation and Benchmarking Using DEA

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Title: Performance Evaluation and Benchmarking Using DEA


1
Performance Evaluation and Benchmarking Using DEA
  • Joe Zhu
  • Department of Management
  • Worcester Polytechnic Institute
  • Worcester, MA 01609
  • jzhu_at_wpi.edu
  • www.deafrontier.com

2
Outline
  • What is DEA?
  • New Models/Uses
  • Two-Stage Model
  • Context-dependent DEA
  • Benchmarking
  • Books

3
DEA Banking
  • The Banking industry has been the subject of DEA
    analysis by researchers in various areas and
    probably is the most heavily studied business
  • Branches
  • Banks across countries

Source Paradi et al. 2004
4
DEA
  • Deals with multiple performance measures (inputs
    and outputs) in a single integrated model
  • Includes any necessary measures related to the
    characterization of banking performance
  • Identifies a base-line for comparisons in
    continuous improvement program
  • Provides specific targets for improvement (over
    time)

5
Why DEA?
- Regression can accommodate Multiple inputs
or outputs but not both
- Regression requires a functional
relationship between in/outputs
- Regression provides only average
relationships not best practice
6
Basic DEA Benchmarking Information
  • DEA gives
  • Efficiency rating, or score, for each DMU
  • Efficiency reference set peer group
  • Target for the inefficient DMU
  • Information on how much inputs can be decreased
    or outputs increased to make the unit efficient
    improving productivity performance

7
DEA Performance Improvement
DEA Best-Practice Frontier
Output
D
6
6
6
Output augmentation
6
D
K
D
Input reduction
6
Input
8
Benefits
  • The establishment of the efficient frontier
    consisting of the best performing DMUs
  • A projection to the efficient frontier - a guide
    to what to do for the DMU managers
  • The identification of the peer group, a
    reasonable argument why it is a FAIR comparison
  • An indication of how important a particular DMU
    is as a role model

9
How DEA works?
  • 5 branches
  • Three (B1, B2 B3 are efficient best practice
    frontier)
  • B4 and B5 are inefficient
  • Target for B4 is T1 (decrease inputs)

10
How DEA works?
  • 5 branches
  • Three (H1, H2 H3 are efficient best practice
    frontier)
  • H4 and H5 are inefficient
  • Target for B4 is T2 (increase outputs)

11
More Information on DEA
  • Web
  • www.deafrontier.com
  • Books
  • Cooper, W.W., Lawrence M. Seiford, and K. Tone.
    2000. Data Envelopment Analysis A Comprehensive
    Reference Text with Models, Applications,
    References, and DEA-Solver Software. Kluwer
    Academic Publishers, Boston
  • Zhu, J. 2002. Quantitative Models for Performance
    Evaluation and Benchmarking Data Envelopment
    Analysis with Spreadsheets. Kluwer Academic
    Publishers, Boston
  • Softwares
  • DEA Excel Solver (DEAFrontier)

12
DEA IT
  • Indirect impact of IT on productivity
  • Two Stage DEA Model
  • Chen, Y. and Zhu, J., Measuring information
    technologys indirect impact on firm performance,
    Information Technology Management Journal, Vol.
    5, Issue 1-2 (2004), 9-22.

13
What is Benchmarking?
  • ... a process of defining valid measures of
    performance comparison among peer units, using
    them to determine the relative positions of the
    peer units and, ultimately, establishing a
    standard of excellence.

14
Acceptance System Decision Rule
  • Trout et al. (1996, COR, Vol 23, 405-408)
  • acceptance/rejection of credit risks
  • Seiford Zhu (1998, COR, Vol. 25, 329-332)

Benchmarking
15
Approach
DEA Best-Practice Frontier/Benchmarks
Output
l
6
6
6
new activities
6
T
T
T
T
6
6
Input
16
Business Process Re-engineering
  • Compare new bank branches to the traditional
    best-practice frontier.

s s
s s s
s s

performance
traditional best practice
time
17
Benchmarking results
New branch best-practice
  • Overall, new branches performance is improving

traditional branch best-practice
Cook, W.D., Seiford, L.M. and Zhu, Joe, Models
for performance benchmarking Measuring the
effect of e-commerce activities on banking
performance, OMEGA, Vol.32, Issue 4 (2004),
313-322.
18
Context-dependent DEA
  • Context-dependent DEA
  • Consumers choice is influenced by the context
  • The performance of DMUs should also reflect
    context

19
Journal of Marketing Research
  • Book Review
  • context-dependent DEA (identifying possible
    moderating results) intriguing and, conceivably,
    breathtaking.

20
Service Productivity
  • D. Sherman and J. Zhu, Service Productivity
    Management Improving Service Performance Using
    Data Envelopment Analysis (DEA) Springer, Boston,
    2006, ISBN 0-387-33211-1.

21
DEA Handbook
  • W.W. Cooper, L.M. Seiford and J. Zhu Handbook on
    Data Envelopment Analysis, Springer, Boston,
    2004, ISBN 1-4020-7797-1

22
Modeling Issues
  • W.D. Cook and Joe Zhu, Modeling Performance
    Measurement Applications and Implementation
    Issues in DEA, Springer, Boston, 2005, ISBN
    0-387-24137-X.

23
DEA Finance
  • Mutual funds
  • CTAs
  • Hedge Funds
  • G. Gregoriou and Joe Zhu, Evaluating Hegde Funds
    and CTA Performance Data Envelopment Analysis
    Approach, John Wiley Sons, New York, 2005, ISBN
    0-471-68185-7 .

24
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