Abstract
This study examines the benefits of data envelopment analysis (DEA) in evaluating the performance of decision making units (DMUs). DEA is a mathematical programming tool applied in performance measurement. The problem identified is establishing business support units as value adding business units. A case is made for applying DEA when evaluating the performance of such business support units. To this end, a literature review of the results of applications of DEA to the evaluation of information technology and purchasing supply chain management functions was conducted. The findings indicate the benefits of DEA are that the method identifies efficient performers in a given population and, therefore, allows for benchmarking against the ’best in class’ performer. This as opposed to more commonly used parametric methods, such as regression analysis, which result in a comparator that represents the average performance for a given population, therefore, allowing only for measurement against the average. In addition, the findings indicate that in respect of business support units, the DEA methodology allows for the incorporation of intermediate outcomes, which facilitates the measurement of the contribution of these units to overall company performance. Although the DEA methodology has been widely applied, it is still not as well known or generally applied as the more common approaches. The recommendations made in this paper will be beneficial in bringing DEA to the attention of decision-makers. The recommendations will also raise awareness of the potential benefits to be realised when applying the method in developing performance measurement frameworks for business support units. Keywords: performance measurement, data envelopment analysis, decision making units, business support units. JEL Classification: C61, L25
Highlights
There is an old management saying that you ’can’t manage what you don’t measure’. Neely (2004) indicated that having appropriate performance measures in place facilitates the communication of a well-defined structure for moving towards achieving an organization’s goals and targets. Saranga and Moser (2010) indicate that increasing global competitiveness is forcing companies to cut costs and develop operational excellence
Charnes et al (1994), assert that the result is, instead of arriving at a single optimized regression equation representing an average decision making units (DMUs), data envelopment analysis (DEA) results in an understanding of the relative performance of each DMU
The problem identified is the incorporation of the measurement of value added by business support units to overall company performance, into the performance measurement framework of such support units
Summary
There is an old management saying that you ’can’t manage what you don’t measure’. Neely (2004) indicated that having appropriate performance measures in place facilitates the communication of a well-defined structure for moving towards achieving an organization’s goals and targets. Saranga and Moser (2010) indicate that increasing global competitiveness is forcing companies to cut costs and develop operational excellence. A challenge in respect of business units designated as support functions, is establishing their direct value added to overall corporate financial performance This is cited as a key objective of senior management, and a necessary focus in developing a performance management system for such units (Saranga and Moser, 2010). In order to utilize performance measurement to establish business units as value adding, it is necessary to go beyond merely measuring performance to analyze that performance in such a way as to be able to demonstrate that the function adds value In this respect, Neely (2004) has identified a key challenge in managing through measurement as being to shift the focus to the targets. The research methodology is, archival, using secondary sources of information
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