Evaluating the efficiency of a two-stage production process using data envelopment analysis

Data envelopment analysis (DEA) has been widely used to evaluate the comparative efficiencies of production processes. Most of the DEA applications assume that production processes consist of one stage. However, many production processes such as IT investments have more than one stage. In a two-stage production process, the first stage inputs produce intermediate outputs, which are used as inputs to the second stage to produce the final outputs. In such cases, using single-stage DEA may result in inaccurate efficiency evaluation. To address such problems, DEA models assuming two-stage production processes have been developed. In this paper, we extend two-stage DEA models by considering input and output slacks. We apply our model to the data from the banking industry and compare the results with those of the previous two-stage DEA models. Our model can identify weakly efficient units of evaluation that could not be identified by the previous models.