Performance Evaluation and Benchmarking Using DEA

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Performance Evaluation and Benchmarking Using DEA

• Joe Zhu
• Department of Management
• Worcester Polytechnic Institute
• Worcester, MA 01609
• jzhu_at_wpi.edu
• www.deafrontier.com

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Outline

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

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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
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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)

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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
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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

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DEA Performance Improvement
DEA Best-Practice Frontier
Output
D
6
6
6
Output augmentation
6
D
K
D
Input reduction
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Input
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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

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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)

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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)

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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)

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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.

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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.

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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
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Approach
DEA Best-Practice Frontier/Benchmarks
Output
l
6
6
6
new activities
6
T
T
T
T
6
6
Input
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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
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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.
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Context-dependent DEA

• Context-dependent DEA
• Consumers choice is influenced by the context
• The performance of DMUs should also reflect
  context

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Journal of Marketing Research

• Book Review
• context-dependent DEA (identifying possible
  moderating results) intriguing and, conceivably,
  breathtaking.

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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.

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DEA Handbook

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

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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.

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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 .

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