Dea

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Dea

  1. 1. Performance Evaluation and Benchmarking Using DEA Joe Zhu Department of Management Worcester Polytechnic Institute Worcester, MA 01609 jzhu@wpi.edu www.deafrontier.com
  2. 2. Data Envelopment Analysis Joe Zhu 2 Outline • What is DEA? • New Models/Uses • Two-Stage Model • Context-dependent DEA • Benchmarking • Books
  3. 3. 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 Inputs FTE in dollars Premise/IT expenses Other Expenses Outputs Loan Balances Deposit Balances Securities Balances Gross Revenue Bank Branch Inputs FTE in dollars Premise/IT expenses Other Expenses Outputs Loan Balances Deposit Balances Securities Balances Gross Revenue Source: Paradi et al. 2004
  4. 4. Data Envelopment Analysis Joe Zhu 4 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. 5. Data Envelopment Analysis Joe Zhu 5 - 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 6 6 6 6 6 6 6 6 6 6 6 6 6 predicted average behavior
  6. 6. Data Envelopment Analysis Joe Zhu 6 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. 7. Data Envelopment Analysis Joe Zhu 7 DEA & Performance Improvement DEA Best-Practice Frontier Input Output 6 6 6 6 KInput reduction 6 D Output augmentation D D
  8. 8. Data Envelopment Analysis Joe Zhu 8 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. 9. Data Envelopment Analysis Joe Zhu 9 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 SupplyDollars
  10. 10. Data Envelopment Analysis Joe Zhu 10 H4 H5 H1 H2 H3 T2 0 50 100 150 200 250 300 350 400 450 0 100 200 300 400 500 Sales MarketShare  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. 11. Data Envelopment Analysis Joe Zhu 11 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)  …
  12. 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. 13. Data Envelopment Analysis Joe Zhu 13 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. 14. Data Envelopment Analysis Joe Zhu 14 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
  15. 15. Data Envelopment Analysis Joe Zhu 15 Approach DEA Best-Practice Frontier/Benchmarks Input Output T 6 6 6 6 T T 6 T 6  new activities
  16. 16. Data Envelopment Analysis Joe Zhu 16 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. 17. Data Envelopment Analysis Joe Zhu 17 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.
  18. 18. Data Envelopment Analysis Joe Zhu 18 Context-dependent DEA • Context-dependent DEA • Consumer’s choice is influenced by the context • The performance of DMUs should also reflect “context”
  19. 19. Data Envelopment Analysis Joe Zhu 19 Journal of Marketing Research • Book Review – context- dependent DEA (identifying possible moderating results) intriguing and, conceivably, breathtaking.
  20. 20. Data Envelopment Analysis Joe Zhu 20 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.
  21. 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 1-4020-7797-1
  22. 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, Bo ston, 2005, ISBN 0-387-24137-X.
  23. 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 0-471-68185-7 .
  24. 24. Data Envelopment Analysis Joe Zhu 24

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