Reconciling ratio analysis and Data Envelopment Analysis as performance assessment tools

Reconciling ratio analysis and Data Envelopment Analysis as performance assessment tools

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Article ID: iaor20084330
Country: Netherlands
Volume: 178
Issue: 1
Start Page Number: 277
End Page Number: 291
Publication Date: Apr 2007
Journal: European Journal of Operational Research
Authors: ,
Keywords: statistics: data envelopment analysis
Abstract:

The assessment of operational performance remains a fundamental challenge both in practice and in theory. Data envelopment analysis (DEA) is one method developed in production economic theory and applied by researchers to study groups of enterprises. In practice, individual enterprises almost universally rely on simple output–input ratios. Each approach has its strengths and weaknesses, but the theoretical connection between the two has not been fully articulated. This paper uses the framework of DEA to establish a mathematical relationship between DEA efficiency scores and corresponding ratio analysis. The relationship can be expressed as a product of seven components: technical efficiency, technical change, scale efficiency, input slack factor, input substitution factor, output slack factor and output substitution factor.

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