Quantifying Organizational Ability at Manufacturing Plants

We validate the use of a three-stage approach using data envelopment analysis (DEA) for quantifying organizational ability and relating it to operating performance for a large sample of manufacturing plants operating in Canada. In our first stage, we apply DEA to obtain relative plant efficiency based on plant output (sales revenue) and inputs that include various labour quantities, representing different productive activities, and non-labour operating costs. Our second stage relates relative plant efficiency obtained in the first stage to plant characteristics that may influence plant efficiency to obtain the residual value as a measure of organizational ability. In our third stage, we relate the plant cost ratio in t + 1 to the measure of organizational ability obtained for period t and document that plants with higher organizational ability achieve lower future cost ratios. Our analysis adds new insights about the determinants and implications of organizational ability at the establishment level.