Scale and cost efficiency analysis of networks of processes

Abstract

In this paper a simple way of computing technical, scale, cost and allocative efficiency scores for homogeneous networks of processes is presented. The system Production Possibility Set (PPS) is formed through the composition of the PPS of the individual processes, which, in turn, are modelled in the conventional, axiomatic way using observed data. Firstly, the overall system scale and technical efficiency are computed using the relational network DEA approach. Local Returns To Scale (RTS) can also be estimated with these models. Secondly, assuming the prices of exogenous inputs are known, a minimum cost network DEA model is solved, from which cost and allocative efficiencies are derived. The proposed approach is illustrated with a two-stage problem from the literature, showing the usefulness of a more detailed problem assessment both in terms of technical and scale efficiency and RTS and in terms of cost and allocative efficiency.