Decomposition of technical and scale efficiencies in two‐stage production systems

Conventional data envelopment analysis (DEA) models are used to measure the technical and scale efficiencies of a system when it is considered as a whole unit. This paper extends the efficiency measurement to two‐stage systems where each stage has one process and all the outputs from the first process become the inputs of the second. An input‐oriented DEA model for the first process is developed to separate the process efficiency into the input technical and scale efficiencies, and an output‐oriented model is developed for the second process to separate the process efficiency into the output technical and scale efficiencies. Combining the two models, the system efficiency is expressed as the product of the overall technical and scale efficiencies, where the overall technical and scale efficiencies are the products of the corresponding efficiencies of the two processes, respectively. The detailed decomposition allows the sources of inefficiency to be identified.