Performance Evaluation and Benchmarking Using DEA JOe Zhu Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester Polytechnic Institute Worcester, MA 01609 jzhu@wpi.edu www.deafrontier.com Data Envelopment Analysis (DEA) is a relatively new data oriented approach for evaluating the performance of a set of peer entities called Decision Making Units (DMUs) which convert multiple inputs into multiple outputs. The definition of a DMU is generic and flexible. Recent years have seen a great variety of applications of DEA for use in evaluating the performances of many different kinds of entities engaged in many different activities in many different contexts in many different countries. This talk will introduce DEA and discuss how DEA can be applied to such areas as impact of information technology, marketing, finance, supply chain performance and benchmarking.

Data Envelopment Analysis Joe Zhu Outline What is DEA? New Models/Uses Two-Stage Model Context-dependent DEA Benchmarking Books Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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 Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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) Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu Why DEA? DEA Best-Practice Frontier Input Output 6 predicted average behavior - 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 Data Envelopment Analysis Joe Zhu

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 Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu DEA & Performance Improvement DEA Best-Practice Frontier Output D¢¢ 6 6 6 Output augmentation 6 D¢ K D Input reduction 6 Input Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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 Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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) Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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) Data Envelopment Analysis Joe Zhu

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) Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu DEA & IT Indirect impact of IT on productivity Two Stage DEA Model Chen, Y. and Zhu, J., Measuring information technology’s indirect impact on firm performance, Information Technology & Management Journal, Vol. 5, Issue 1-2 (2004), 9-22. Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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. Data Envelopment Analysis Joe Zhu

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 Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu Approach DEA Best-Practice Frontier/Benchmarks Output l 6 6 6 new activities 6 T T T T 6 6 Input Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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 Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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. Data Envelopment Analysis Joe Zhu

Context-dependent DEA Consumer’s choice is influenced by the context The performance of DMUs should also reflect “context” Data Envelopment Analysis Joe Zhu

Journal of Marketing Research Book Review context-dependent DEA (identifying possible moderating results) intriguing and, conceivably, breathtaking. Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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. Data Envelopment Analysis Joe Zhu

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

Data Envelopment Analysis Joe Zhu 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. Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu 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 . Data Envelopment Analysis Joe Zhu

Data Envelopment Analysis Joe Zhu