PERFORMANCE MANAGEMENT

Efficiency-based performance measurement:

DATA ENVELOPMENT ANALYSIS

Dr. oec. HSG SYARIFA HANOUM, S.T., M.T., CSEP

Departemen of Business Management

Institut Teknologi Sepuluh Nopember (ITS)
2018
Efficiency and Productivity
An example of a firm is a shirt factory that uses materials, labour
and capital (inputs) to produce shirts (output). The performance of
this factory can be defined in many ways.

The general term "decision making unit" (DMU) is used to

describe a productive entity in instances when the term "firm" may
not be entirely relevant.

A natural measure of performance is a productivity ratio:

the ratio of outputs to inputs, where larger values of this
ratio are associated with better performance.

Coelli, T.J., Rao, D.S.P., O’Donnell, C.J., & Battese, G. E. (2005). An introduction to productivity and
efficiency analysis (2nd Ed.). Springer Science + Business Media, Inc
 Productivity
Conceptually ...

Productivity = Outputs
Inputs
Reality if more complex. A real system (company, business, production,
etc) may consist multi dimension of inputs and outputs ...

Inputs Outputs
equipment #type A cust.
facility space Technology
#type B cust.
+
server labor Decision Making quality index
mgmt. labor $ oper. profit
Efficiency and Productivity

Some terms that are frequently used:

• productivity;
• technical efficiency;
• allocative efficiency;
• technical change;
• scale economies;
• total factor productivity (TFP);
• production frontier; and
• feasible production set.

The terms, productivity and efficiency, have been used

frequently in the media over the last ten years by a variety of
commentators.

They are often used interchangeably, but this is unfortunate

because they are not precisely the same things
Coelli, T.J., Rao, D.S.P., O’Donnell, C.J., & Battese, G. E. (2005). An introduction to productivity and
efficiency analysis (2nd Ed.). Springer Science + Business Media, Inc
Data Envelopment Analysis

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Data Envelopment Analysis

 The DEA mathematical models

 The basic DEA model : Non-linear (fractional)
 The linear DEA model: input and output oriented
models

Ramanathan, R. (2003). An introduction to data envelopment analysis:

A tool for performance measurement. Sage Publications Inc.
 Chapter 2: Mathematical Programming Aspects of DEA
(page:38-65)

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 Additional References
An Example of a BASIC / Non-linear / Fractional DEA mathematical model

https://www.youtube.com/watch?v=sz9-nxcLB5c
 Additional References
MCDM with DEA – an Example of Input oriented DEA mathematical model

https://www.youtube.com/watch?v=fWszxTLcdTc&t=300s
Exercise 2

(1) Formulate the above DEA problem into a basic DEA model (non-linear)
(2) Formulate the above DEA problem into an input-oriented DEA model
(3) Solve the above DEA problem with the graphical method, determine DMUs
who happen to be efficient !!