The comparison of data envelopment analysis (DEA) and financial analysis results in a production simulation game

Abstract

Production and service systems are generally evaluated based on financial information. The financial approach looks for opportunities to boost profits in two main ways: by decreasing operating costs and/or by increasing production quantity. Consequently, the cost of operation is evaluated and cost reduction possibilities are explored with proper cost analysis methods. Scoring methods extend the frontiers of performance evaluation by also employing non-financial information, although these methods generally contain several subjective elements. Data Envelopment Analysis (DEA) aims to integrate several performance measures into an aggregate output measure and several resource usage characteristics into an aggregate input measure. Based on the inputs applied and on the outputs generated, an efficiency score is calculated using linear programming. The objective of this paper is to illustrate the differences between performance evaluations, based on financial information, versus the DEA results. The results of a production simulation game are used to show how a DEA based performance evaluation can be carried out. The additional information provided by DEA may help to identify the causes of inefficient operation and to explore ways of improving efficiency.