data envelopment analysis (dea) tool for benchmarking
DESCRIPTION
Data Envelopment Analysis (DEA) Tool for Benchmarking. DEA is a key benchmarking tool - Multidimensional analytical in nature - Deals with multiple-input, multiple-output productivity ratios. - PowerPoint PPT PresentationTRANSCRIPT
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
