1. 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
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.

2. 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

3. 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

4. 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

5. 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

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
Data Envelopment Analysis Joe Zhu

7. 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

8. 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

9. 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

10. 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

11. More Information on DEA
Web …
Books
Cooper, W.W., Lawrence M. Seiford, and K. Tone Data Envelopment Analysis: A Comprehensive Reference Text with Models, Applications, References, and DEA-Solver Software. Kluwer Academic Publishers, Boston
Zhu, J 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

12. 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

13. 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

14. Acceptance System Decision Rule
Trout et al. (1996, COR, Vol 23, )
acceptance/rejection of credit risks
Seiford & Zhu (1998, COR, Vol. 25, )
Benchmarking
Data Envelopment Analysis Joe Zhu

15. 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

16. 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

17. 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),
Data Envelopment Analysis Joe Zhu

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

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

20. 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
Data Envelopment Analysis Joe Zhu

21. 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
Data Envelopment Analysis Joe Zhu

22. 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 X.
Data Envelopment Analysis Joe Zhu

23. 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
Data Envelopment Analysis Joe Zhu

24. Data Envelopment Analysis Joe Zhu