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Data Envelopment Analysis (DEA) Tool for Benchmarking.

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Presentation on theme: "Data Envelopment Analysis (DEA) Tool for Benchmarking."— Presentation transcript:

1 Data Envelopment Analysis (DEA) Tool for Benchmarking

2 It supports the identification of Best Practice Units and can help identify those that either need improvement or could be used for benchmarking. Could be deployed in Internal, Process, Competitive and Strategic Benchmarking. Offers more insight than a traditional “gap analysis” generally used in benchmarking. Basic intuition: - Input/output model formulation that defines the efficiencies of various entities called DMU’s, the decision making units; - The analytics discriminates the relative efficiencies of various DMU’s; - Identifies Peers for the inefficient firms, whom they can emulate in order to improve their efficiencies. DEA is a key benchmarking tool - Multidimensional analytical in nature - Deals with multiple-input, multiple-output productivity ratios

3 Which Unit is most productive? (one input and one output) DMU = decision making unit DMU labor hrs. #cust

4 DMU labor hrs. #cust. #cust/hr Relative Efficiency % % % % % #cust. labor hrs. x x x x x slope = 1.87 DMU’s 1,3,4,5 are dominated by DMU 2.

5 FirmInput 1 No. of Employees (in thousands) Input 2 Capital Employed (Rs. In lacs) Output Value Added (Rs. In lacs) A B C D PERFORMANCE DATA OF FOUR DMUs (two inputs and one output)

6 FirmInput 1 Value added per Employee Input 2 Value Added per Capital employed A B C D COMPARITIVE PERFORMANCE OF FOUR DMUs FirmInput 1 Value added per Employee Input 2 Value Added per Capital employed A1.00 (92.6%)0.21 (100%) B0.12 (11.1%)0.09 (42.8%) C1.08 (100%)0.18 (85.6%) D0.33 (30.6%)0.13 (61.9%) COMPARITIVE PERFORMANCE OF FOUR DMUs

7 FirmInput 1 Employee per Value added Input 2 Capital employed Value Added A B C D COMPARITIVE PERFORMANCE OF FOUR DMUs

8 Employee / Value Added Capital employed / Value Added O C (.93, 5.57) B (8.5, 11) A (1.0, 4.78) D (3.0, 7.70) Efficiency Frontier

9 Employee / Value Added Capital employed / Value Added O C (.93, 5.57) B (8.5, 11) A (1.0, 4.78) D (3.0, 7.70) Efficiency Frontier E (3.69, 4.78)

10 Employee / Value Added Capital employed / Value Added O C (.93, 5.57) B (8.5, 11) A (1.0, 4.78) D (3.0, 7.70) Efficiency Frontier Relative Eff. = Actual Performance = OB OE = √( ) = 43.44% √ ( ) Best Possible Performance E (3.69, 4.78)

11 Employee / Value Added Capital employed / Value Added O C (.93, 5.57) B (8.5, 11) A (1.0, 4.78) E (3.69, 4.78) D (3.0, 7.70) Efficiency Frontier F (.93, 11)

12 Employee / Value Added Capital employed / Value Added F (.93, 11) O C (.93, 5.57) B (8.5, 11) A (1.0, 4.78) D (3.0, 7.70) Efficiency Frontier G (8.5, 4.78) E (3.69, 4.78)

13 Employee / Value Added Capital employed / Value Added F (.93, 11) O C (.93, 5.57) B (8.5, 11) A (1.0, 4.78) G (8.5, 4.78) E (3.69, 4.78) D (3.0, 7.70) Efficiency Frontier Relative Eff. = Actual Performance = OB OE = √( ) = 43.44% √ ( ) Best Possible Performance

14 Firm B can move up to the efficient frontier in at least three ways: 1.Reducing only the number of employees: By moving to the point F => Input Target for Employees = 0.2 x 0.93 = => Employees Surplus = Current input – Input target = 1.7 – = Reducing only its capital employed: By moving to point G => Input Target for Capital = 0.2 x 4.78 = => Capital Surplus = Current input – Input target =2.000 – = (a) Reducing both, the capital employed as well as the number of employees, in the same ratio; or (b) Enhancing value added only; By moving to point E Setting Performance Targets for the Inefficient Firms

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