Data Envelopment Analysis (DEA)

Tool for Benchmarking

•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

Which Unit is most productive?(one input and one output)

DMU = decision making unit

DMU labor hrs. #cust. 1 100 150 2 75 140 3 120 160 4 100 140 5 40 50

DMU labor hrs. #cust. #cust/hr Relative Efficiency 1 100 150 1.50 80.21% 2 75 140 1.87 100 % 3 120 160 1.33 71.12% 4 100 140 1.40 74.87% 5 40 50 1.25 66.84%

#cust.

labor hrs.

x x

50 100

100

200

x

x

x

slope = 1.87

DMU’s 1,3,4,5 are dominated by DMU 2.

Firm Input 1

No. of Employees

(in thousands)

Input 2

Capital Employed

(Rs. In lacs)

Output

Value Added

(Rs. In lacs)

A 1.8 8.6 1.8

B 1.7 2.2 0.2

C 2.6 15.6 2.8

D 12.3 31.6 4.1

PERFORMANCE DATA OF FOUR DMUs

(two inputs and one output)

Firm Input 1

Value added per Employee

Input 2

Value Added per Capital employed

A 1.00 0.21

B 0.12 0.09

C 1.08 0.18

D 0.33 0.13

COMPARITIVE PERFORMANCE OF FOUR DMUs

Firm Input 1

Value added per Employee

Input 2

Value Added per Capital employed

A 1.00 (92.6%) 0.21 (100%)

B 0.12 (11.1%) 0.09 (42.8%)

C 1.08 (100%) 0.18 (85.6%)

D 0.33 (30.6%) 0.13 (61.9%)

COMPARITIVE PERFORMANCE OF FOUR DMUs

Firm Input 1

Employee per Value added

Input 2

Capital employed Value Added

A 1.000 4.778

B 8.500 11.000

C 0.929 5.571

D 3.000 7.707

COMPARITIVE PERFORMANCE OF FOUR DMUs

Employee / Value Added

Cap

ital

em

plo

yed

/ V

alu

e A

dd

ed

O

C (.93, 5.57)(.93, 5.57)

B (8.5, 11)(8.5, 11)

A (1.0, 4.78)(1.0, 4.78)

D (3.0, 7.70)(3.0, 7.70)

Eff

icie

ncy

Fro

nti

er

Efficiency Frontier

Employee / Value Added

Cap

ital

em

plo

yed

/ V

alu

e A

dd

ed

O

C (.93, 5.57)(.93, 5.57)

B (8.5, 11)(8.5, 11)

A (1.0, 4.78)(1.0, 4.78)

D (3.0, 7.70)(3.0, 7.70)

Eff

icie

ncy

Fro

nti

er

Efficiency FrontierE (3.69, 4.78)(3.69, 4.78)

Employee / Value Added

Cap

ital

em

plo

yed

/ V

alu

e A

dd

ed

O

C (.93, 5.57)(.93, 5.57)

B (8.5, 11)(8.5, 11)

A (1.0, 4.78)(1.0, 4.78)

D (3.0, 7.70)(3.0, 7.70)

Eff

icie

ncy

Fro

nti

er

Efficiency Frontier

Relative Eff. = Actual Performance

= OB

OE=

√(3.692+4.782)= 43.44%

√(8.52+112)

Best Possible Performance

E (3.69, 4.78)(3.69, 4.78)

Employee / Value Added

Cap

ital

em

plo

yed

/ V

alu

e A

dd

ed

O

C (.93, 5.57)(.93, 5.57)

B (8.5, 11)(8.5, 11)

A (1.0, 4.78)(1.0, 4.78) E (3.69, 4.78)(3.69, 4.78)

D (3.0, 7.70)(3.0, 7.70)

Eff

icie

ncy

Fro

nti

er

Efficiency Frontier

F (.93, 11)(.93, 11)

Employee / Value Added

Cap

ital

em

plo

yed

/ V

alu

e A

dd

ed

F (.93, 11)(.93, 11)

O

C (.93, 5.57)(.93, 5.57)

B (8.5, 11)(8.5, 11)

A (1.0, 4.78)(1.0, 4.78)

D (3.0, 7.70)(3.0, 7.70)

Eff

icie

ncy

Fro

nti

er

Efficiency FrontierG (8.5, 4.78)(8.5, 4.78)E (3.69, 4.78)(3.69, 4.78)

Employee / Value Added

Cap

ital

em

plo

yed

/ V

alu

e A

dd

ed

F (.93, 11)(.93, 11)

O

C (.93, 5.57)(.93, 5.57)

B (8.5, 11)(8.5, 11)

A (1.0, 4.78)(1.0, 4.78) G (8.5, 4.78)(8.5, 4.78)E (3.69, 4.78)(3.69, 4.78)

D (3.0, 7.70)(3.0, 7.70)

Eff

icie

ncy

Fro

nti

er

Efficiency Frontier

Relative Eff. = Actual Performance

= OB

OE=

√(3.692+4.782)= 43.44%

√(8.52+112)

Best Possible Performance

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 = 0.186=> Employees Surplus = Current input – Input target

= 1.7 – 0.186 = 1.514

2. Reducing only its capital employed:By moving to point G

=> Input Target for Capital = 0.2 x 4.78 = 0.956 => Capital Surplus = Current input – Input target

=2.000 – 0.956 = 1.244

3. (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