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A comparison of data envelopment analysis and ratio analysis as tools for performance assessment

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  • Thanassoulis, E.
  • Boussofiane, A.
  • Dyson, R. G.
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    Abstract

    This paper compares data envelopment analysis (DEA) and ratio analysis as alternative tools for assessing the performance of organisational units such as bank branches and schools. Such units typically use one or more resources to secure one or more outputs, the inputs and/or outputs being possibly incommensurate. The assessment of District Health Authorities in England on the provision of perinatal care is used as a vehicle for comparing the two methods. The comparison focuses on how well the two methods agree on the performance of a unit relative to that of other units, and on the estimates of targets each method provides for improving the performance of units. It is found that provided the performance indicators capture all variables used in the DEA assessment the two methods agree reasonably closely on the performance of the units as a whole, though this depends on the way the performance indicators are combined into a summary figure of performance. The two methods can disagree substantially on the relative performance of individual units. Ratio analysis, unlike DEA, is not found to be suitable for setting targets so that units can become more efficient. This is mainly due to the fact that DEA takes simultaneous account of all resources and outputs in assessing performance while ratio analysis relates only one resource to one output at a time. However, the two methods can support each other if used jointly. Ratios do provide useful information on the performance of a unit on specific aspects and they can support the communication of DEA results to non-specialists when the two methods agree on performance.

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    Bibliographic Info

    Article provided by Elsevier in its journal Omega.

    Volume (Year): 24 (1996)
    Issue (Month): 3 (June)
    Pages: 229-244

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    Handle: RePEc:eee:jomega:v:24:y:1996:i:3:p:229-244

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    Related research

    Keywords: DEA performance measurement efficiency health service ratio analysis;

    References

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    1. Thanassoulis, E. & Dyson, R. G., 1992. "Estimating preferred target input-output levels using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 56(1), pages 80-97, January.
    2. Cook, Wade D. & Kazakov, Alex & Roll, Yaakov & Seiford, Lawrence M., 1991. "A data envelopment approach to measuring efficiency: Case analysis of highway maintenance patrols," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 20(1), pages 83-103.
    3. Thanassoulis, Emmanuel, 1995. "Assessing police forces in England and Wales using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 87(3), pages 641-657, December.
    4. Boussofiane, A. & Dyson, R. G. & Thanassoulis, E., 1991. "Applied data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 52(1), pages 1-15, May.
    5. Thompson, Russell G. & Langemeier, Larry N. & Lee, Chih-Tah & Lee, Euntaik & Thrall, Robert M., 1990. "The role of multiplier bounds in efficiency analysis with application to Kansas farming," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 93-108.
    6. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    7. Michael Barrow & Adam Wagstaff, 1989. "Efficiency measurement in the public sector: an appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 10(1), pages 72-97, February.
    8. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    9. Thanassoulis, E. & Boussofiane, A. & Dyson, R. G., 1995. "Exploring output quality targets in the provision of perinatal care in England using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 80(3), pages 588-607, February.
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    Citations

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    Cited by:
    1. Shrimal Perera & Michael Skully, 2012. "On the cross-methodological validation of bank efficiency assessments," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(1), pages 26-42, March.
    2. Piot-Lepetit, Isabelle & Nzongang, Joseph, 2014. "Financial sustainability and poverty outreach within a network of village banks in Cameroon: A multi-DEA approach," European Journal of Operational Research, Elsevier, vol. 234(1), pages 319-330.
    3. Gaganis, Chrysovalantis & Pasiouras, Fotios, 2013. "Financial supervision regimes and bank efficiency: International evidence," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5463-5475.
    4. Halkos, George & Tzeremes, Nickolaos, 2010. "Performance evaluation using bootstrapping DEA techniques: Evidence from industry ratio analysis," MPRA Paper 25072, University Library of Munich, Germany.
    5. Giokas, Dimitris I., 2001. "Greek hospitals: how well their resources are used," Omega, Elsevier, vol. 29(1), pages 73-83, February.
    6. Woo, Chi-Keung & Horowitz, Ira & Olson, Arne & Horii, Brian & Baskette, Carmen, 2006. "Efficient frontiers for electricity procurement by an LDC with multiple purchase options," Omega, Elsevier, vol. 34(1), pages 70-80, January.
    7. Avkiran, Necmi K., 2011. "Association of DEA super-efficiency estimates with financial ratios: Investigating the case for Chinese banks," Omega, Elsevier, vol. 39(3), pages 323-334, June.
    8. Sailesh Tanna & Fotios Pasiouras & Matthias Nnadi, 2011. "The Effect of Board Size and Composition on the Efficiency of UK Banks," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 18(3), pages 441-462, November.
    9. Leigh Drake & Richard Simper, 2001. "The Economic Evaluation of Policing Activity: An Application of a Hybrid Methodology," European Journal of Law and Economics, Springer, vol. 12(3), pages 173-192, November.
    10. Paradi, Joseph C. & Zhu, Haiyan, 2013. "A survey on bank branch efficiency and performance research with data envelopment analysis," Omega, Elsevier, vol. 41(1), pages 61-79.
    11. Ozren Despić & Mladen Despić & Joseph Paradi, 2007. "DEA-R: ratio-based comparative efficiency model, its mathematical relation to DEA and its use in applications," Journal of Productivity Analysis, Springer, vol. 28(1), pages 33-44, October.
    12. Drake, Leigh & Simper, Richard, 2000. "Productivity estimation and the size-efficiency relationship in English and Welsh police forces: An application of data envelopment analysis and multiple discriminant analysis," International Review of Law and Economics, Elsevier, vol. 20(1), pages 53-73, March.
    13. Chen, Wen-Chih & McGinnis, Leon F., 2007. "Reconciling ratio analysis and DEA as performance assessment tools," European Journal of Operational Research, Elsevier, vol. 178(1), pages 277-291, April.
    14. Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2013. "Efficiency and stock returns: evidence from the insurance industry," Journal of Productivity Analysis, Springer, vol. 40(3), pages 429-442, December.
    15. Sahoo, Biresh K. & Acharya, Debashis, 2010. "An alternative approach to monetary aggregation in DEA," European Journal of Operational Research, Elsevier, vol. 204(3), pages 672-682, August.
    16. Liu, W.B. & Zhang, D.Q. & Meng, W. & Li, X.X. & Xu, F., 2011. "A study of DEA models without explicit inputs," Omega, Elsevier, vol. 39(5), pages 472-480, October.

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