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Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester Polytechnic Institute Worcester, MA 01609

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Presentation on theme: "Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester Polytechnic Institute Worcester, MA 01609"— Presentation transcript:

1 Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester Polytechnic Institute Worcester, MA

2 Data Envelopment Analysis Joe Zhu 2 Outline What is DEA? New Models/Uses Two-Stage Model Context-dependent DEA Benchmarking Books

3 Data Envelopment Analysis Joe Zhu3 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 Data Envelopment Analysis Joe Zhu4 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 Data Envelopment Analysis Joe Zhu5 - 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 Why DEA? DEA Best-Practice Frontier Input Output predicted average behavior

6 Data Envelopment Analysis Joe Zhu6 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 Data Envelopment Analysis Joe Zhu7 DEA & Performance Improvement DEA Best-Practice Frontier Input Output K Input reduction 6 D Output augmentation D D 

8 Data Envelopment Analysis Joe Zhu8 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 Data Envelopment Analysis Joe Zhu9 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 Data Envelopment Analysis Joe Zhu10 5 branches Three (H1, H2 & H3 are efficient – best practice frontier) H4 and H5 are inefficient Target for B4 is T2 (increase outputs) How DEA works?

11 Data Envelopment Analysis Joe Zhu11 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) …

12 Data Envelopment Analysis Joe Zhu 12 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.

13 Data Envelopment Analysis Joe Zhu13 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 Data Envelopment Analysis Joe Zhu14 Acceptance System Decision Rule Trout et al. (1996, COR, Vol 23, ) Trout et al. (1996, COR, Vol 23, ) –acceptance/rejection of credit risks Seiford & Zhu (1998, COR, Vol. 25, ) Seiford & Zhu (1998, COR, Vol. 25, ) Benchmarking

15 Data Envelopment Analysis Joe Zhu15 Approach DEA Best-Practice Frontier/Benchmarks Input Output T T T 6 T 6 new activities

16 Data Envelopment Analysis Joe Zhu16 Business Process Re- engineering s s s s  s s  s traditional best practice performance time Compare new bank branches to the traditional best-practice frontier.

17 Data Envelopment Analysis Joe Zhu17 Benchmarking results u Overall, new branches’ performance is improving New branch best-practice 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),

18 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”

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

20 Data Envelopment Analysis Joe Zhu20 Service Productivity D. Sherman and J. Zhu, Service Productivity Management: Improving Service Performance Using Data Envelopment Analysis (DEA) Springer, Boston, 2006, ISBN D. Sherman and J. Zhu, Service Productivity Management: Improving Service Performance Using Data Envelopment Analysis (DEA) Springer, Boston, 2006, ISBN

21 Data Envelopment Analysis Joe Zhu 21 DEA Handbook W.W. Cooper, L.M. Seiford and J. Zhu Handbook on Data Envelopment Analysis, Springer, Boston, 2004, ISBN

22 Data Envelopment Analysis Joe Zhu 22 Modeling Issues  W.D. Cook and Joe Zhu, Modeling Performance Measurement: Applications and Implementation Issues in DEA, Springer, Boston, 2005, ISBN X.

23 Data Envelopment Analysis Joe Zhu 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

24 Data Envelopment Analysis Joe Zhu 24


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