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Performance Evaluation and Benchmarking Using DEA
Joe ZhuDepartment of ManagementWorcester Polytechnic InstituteWorcester, MA [email protected]
Data Envelopment Analysis Joe Zhu
2
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
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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 performanceIdentifies a “base-line” for comparisons in
continuous improvement programProvides specific targets for improvement
(over time)
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- 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
Input
Output
6
6 6
6
6
66
6
66
6
6
6predicted average behavior
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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 ImprovementDEA Best-Practice Frontier
Input
Output
6 6
6
6K
Input reduction
6
D
Output augmentation
D¢
D¢¢
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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)
B4
B5
B1
B2
B3
T1
0
50
100
150
200
250
300
350
400
450
0 20 40 60
Teller Hours
Su
pp
ly D
oll
ars
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H4
H5
H1
H2
H3
T2
0
50
100
150
200
250
300
350
400
450
0 100 200 300 400 500
Sales
Ma
rke
t S
ha
re
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?
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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 technology’s 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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ApproachDEA Best-Practice Frontier/Benchmarks
Input
Output
T
6 6
6
6
T
T
6T
6
l
new activities
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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.
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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.
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Context-dependent DEA• Context-dependent
DEA• Consumer’s 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 HandbookW.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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