Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester...

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Performance Evaluation and Benchmarking Using DEA

Joe ZhuDepartment of ManagementWorcester Polytechnic InstituteWorcester, MA 01609jzhu@wpi.eduwww.deafrontier.com

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

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

Bank Branch

InputsFTE in dollarsPremise/IT expensesOther Expenses

OutputsLoan BalancesDeposit BalancesSecurities BalancesGross Revenue

Bank Branch

InputsFTE in dollarsPremise/IT expensesOther Expenses

OutputsLoan BalancesDeposit BalancesSecurities BalancesGross Revenue

Source: Paradi et al. 2004

Deals with multiple performance measures (inputs and outputs) in a single integrated model Includes any necessary measures related to the

characterization of banking performanceIdentifies a “base-line” for comparisons in

continuous improvement programProvides specific targets for improvement

(over time)

- Regression can accommodateMultiple inputs oroutputs but not both

- Regression requires afunctional relationshipbetween in/outputs

- Regression provides onlyaverage relationshipsnot best practice

Why DEA?DEA Best-Practice Frontier

Output

predicted average behavior

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

DEA & Performance ImprovementDEA Best-Practice Frontier

Output

Input reduction

Output augmentation

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

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)

0 20 40 60

Teller Hours

0 100 200 300 400 500

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?

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) …

DEA & ITDEA & 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 ZhuData Envelopment Analysis Joe Zhu 1313

What isWhat is Benchmarking?Benchmarking?

... a process of defining valid ... a process of defining valid measures of performance measures of performance comparison among peer units, comparison among peer units, using them to determine the using them to determine the relative positions of the peer relative positions of the peer units and, ultimately, units and, ultimately, establishing a standard of establishing a standard of excellence.excellence.

Acceptance System Decision Acceptance System Decision RuleRule

Trout Trout et al.et al. (1996, COR, Vol 23, 405-408) (1996, COR, Vol 23, 405-408)– acceptance/rejection of credit risksacceptance/rejection of credit risks

Seiford & Zhu (1998, COR, Vol. 25, 329-332)Seiford & Zhu (1998, COR, Vol. 25, 329-332)

Benchmarking

ApproachDEA Best-Practice Frontier/Benchmarks

Output

new activities

Business Process Re-engineering

traditional best practice

performance

• Compare new bank branches to the traditional best-practice frontier.

Benchmarking results

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), 313-322.

Context-dependent DEAContext-dependent DEA• Context-dependent

DEA• Consumer’s choice

is influenced by the context

• The performance of DMUs should also reflect “context”

Journal of Marketing Journal of Marketing ResearchResearch

• Book Review– context-

dependent DEA (identifying possible moderating results) intriguing and, conceivably, breathtaking.

Service ProductivityService Productivity

• D. Sherman and J. Zhu, D. Sherman and J. Zhu, Service Productivity Service Productivity Management: Improving Management: Improving Service Performance Using Service Performance Using Data Envelopment Analysis Data Envelopment Analysis (DEA) Springer, Boston, (DEA) Springer, Boston, 2006, ISBN 0-387-33211-1.2006, ISBN 0-387-33211-1.

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

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.

DEA & FinanceDEA & 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 .

Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester...

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