Decision Support Models

Transcription

1 Decision Support Models Lecture: Performance evaluation Rui Cunha Marques May 9, 2011 Rui Cunha Marques 1

2 BASICS OF PERFORMANCE MEASUREMENT Rui Cunha Marques 2

3 Why measure performance? Identification of good operating practices for dissemination; Most productive operating scales and optimal market structure; The scope for efficiency savings in resource use and/or for output augmentation; Most suitable role model operating units allowing for an inefficient unit to emulate to improve its performance; The marginal rates of substitution between the factors of production; Productivity change over time by each operating unit and by the most efficient of the operating units at each point in time. Rui Cunha Marques 3

4 Performance cycle Direction Organizational change Mission Statement Behavioural responses Objectives Targets Performance measures See Marques and Witte (2010) about benchmarking cycle (Public Money and Management) Rui Cunha Marques 4

5 Performance measurement Areas of application Financial services Regulation Public services (police services, health units, education, etc ) Infrastructure services Agriculture Retail stores Rui Cunha Marques 5

6 Concepts What is Productivity? What is Efficiency? Feasible production set Productivity Technical efficiency Production (or cost) function Operational environment Scale economies Technical change Rui Cunha Marques 6

7 Concepts Performance of firms relation of converting inputs into outputs; Natural measure of performance is a productivity ratio: the ratio of outputs to inputs; The larger the value of this ratio the better the performance; Performance is a relative concept. Rui Cunha Marques 7

8 Informal definitions Productivity Ratio between the output(s) that a firm produces and the input(s) that it uses; Total factor productivity (TFP) Productivity measure involving all factors of production. Rui Cunha Marques 8

9 Informal definitions Productivity and efficiency - frequently mied up; Production frontier (OF ) is used to define the relationship between the input(s) and the output(s); A firm is technically efficient if it is operating on that frontier or technically inefficient if it is beneath that frontier. Efficient firms Inefficient firm Rui Cunha Marques 9

10 Informal definitions Feasible production set: It is the set of all possible input-output combinations; This set consists of all points between the production frontier, OF, and the -ais (inclusive the bounds). y c F b a O Rui Cunha Marques 10

11 Informal definitions The slope of this ray is y/ and hence it provides a measure of productivity; A B: the slope of the ray would be greater higher productivity; B C: the ray from the origin is at a tangent to the production frontier and thereby defines the point of maimum possible productivity. Optimal scale Rui Cunha Marques 11

12 Informal definitions The discussion, so far, does not include a time component Technical change This involves advances in technology that may be represented by an upward shift in the production frontier Rui Cunha Marques 12

13 Informal definitions Technical change is observed by the movement of the production frontier from 0F 0 in period 0 to 0F 1 in period 1; In period 1, all firms can technically produce more output for each level of input, relative to what was possible in period 0. Rui Cunha Marques 13

14 Informal definitions Productivity increase of a firm may not be due to an efficiency improvement, but to a technical change or scale economies, or a combination of all of them; Allocative efficiency Implies optimal structure of inputs (costs) or outputs (profits); Combining allocative and technical efficiency provides an overall economic efficiency measure. Rui Cunha Marques 14

15 Quantities of Interest f f f ( k) kf( ) ( k) kf( ) ( k) kf( ) Too large firm Decreasing returns to scale (DRS) Constant returns to scale (CRS) Increasing returns to scale (IRS) Too small firm A firm may ehibit IRS, if hiring more staff allows for some specialization of labor (or if fied costs are divided into further production units), or DRS if it becomes so large that management is no longer able to eercise effective control. Rui Cunha Marques 15

16 Scale Effect Distinction between technical efficiency and productivity Both B and C are on frontier, hence both are efficient. But productivity of C is greater than B (due to scale effect). Rui Cunha Marques 16

17 Performance model Operational and Institutional Environment INPUTS OUTPUTS Rui Cunha Marques 17

18 Classification Efficiency Productive Allocative Static Dynamic Technical Price Scale Pure technical Without congestion Congestion Rui Cunha Marques 18

19 BENCHMARKING Rui Cunha Marques 19

20 Importance of benchmarking Performance assessment generally reveals very high potential efficiency and productivity earnings; This circumstance occurs due to Quiet life X-Inefficiency Distortions of market In this contet, the application of benchmarking can turn out to be a very relevant tool to save resources and improve the quality of service delivered. Rui Cunha Marques 20

21 Definitions Robert Camp (1989): Benchmarking is the search for industry best practices that lead to superior performance. Marques (2005): Benchmarking can be defined, straightforwardly, as the process of seeking the ecellency, by systematic comparison of performance measures with reference standards. Rui Cunha Marques 21

22 Definitions Benchmarking application objective: Efficiency (productivity) and effectiveness earnings; Efficiency of a given organization or activity/process refers to the comparison between the values of the production factors (inputs) and the products/results (outputs) and their optimal values; Effectiveness measures the level of accomplishment of a given activity (a level of outputs or results) rather than the way it is developed, which is the object of efficiency. Rui Cunha Marques 22

23 Classification Benchmarking methods are classified into: v Metric: the comparative and quantitative process that enable the operators to keep track of their performance through time and compare it with other (similar) operators; v Process: identifies in a first phase, the aspects to be improved and then compares them with best practices from other operators. v Metric benchmarking answers the question about what to improve! v Process benchmarking answers the question about how to improve! Rui Cunha Marques 23

24 Methods Parametric; Non-parametric; Frontier; Non-frontier; Deterministic; Stochastic. y COLS SFA OLS DEA Rui Cunha Marques 24

25 PRODUCTIVITY AND EFFICIENCY MEASUREMENT Rui Cunha Marques 25

26 X2/Output Concepts Technical efficiency (TE) reflects the maimum output attainable from each input level or vice-versa (minimum inputs for a certain level of outputs); Allocative/Price efficiency (AE) in input selection involves selecting a mi of inputs (e.g. labour and capital) that a produces a given quantity of output at minimum cost (given the input prices which prevail). TE(DMU B )=0B /0B AE(DMU B )=0B /0B 0 A A B B l(y) - Isoquant C B D c(y) - Isocost X1/Output Rui Cunha Marques 26

27 X2/Output Concepts Static/Economic efficiency (EE) represents an overall estimation of cost reduction and can be calculated by the product between TE and AE. A EE(DMU B )=0B /0B A B C B B D c(y) l(y) 0 X1/Output DMU A has a slack (distance between A and A) Rui Cunha Marques 27

28 Concepts Scale efficiency (SE) computes the level of savings that would have taken place if the firm was operating at an optimal scale. y b CRS c VRS d'' d' d a o Rui Cunha Marques 28

29 Classification y COLS SFA OLS DEA Performance Evaluation Parametric Approach Non-parametric Approach - Non-frontier M é todos Não Methods - fronteira Regressão Regression Simples (OLS) (OLS) M Frontier é todos Non-frontier M é todos M Frontier é todos Fronteira Methods Não Methods - fronteira Fronteira Methods COLS Fronteiras Stochastic Estoc Frontiers á stica (SFA) Partial measures of N productivity ú meros Í ndices Inde Numbers Data DEA Envelopment FDH Partial Analysis frontier methods (DEA) Rui Cunha Marques 29

30 Performance Indicators PARTIAL MEASURES OF PRODUCTIVITY Rui Cunha Marques 30

31 Definition Performance indicator is a quantified measure that translates the way or the intensity by which a given activity is accomplished in the form of ratio; It can be adimensional (e. g. %) or intensive (e. g. /km). A performance indicator does not intend to be a characteristic of the organization (e. g. population density) A performance indicator does not stop being a partial measure of productivity A performance indicator cannot be analysed out of contet Rui Cunha Marques 31

32 Partial productivity measures Performance indicator m Output Input i j Operador Staff/Passenger (no. / 10 6 t) Ranking Staff/network (n.º / km) Ranking Staff/station (no. / no.) Ranking Moscow metro 14, , ,75 3 New York metro 32, , ,70 2 Lisbon metro 69, , ,04 1 They are partial measures of productivity; Correlation and trade offs between different indicators and dependency on factors not accounted for which make comparisons difficult; Ranking can change according to the indicator; Difficulty to identify best practices to adopt. Despite being useful, easily calculated and with transparent meaning, they can provide biased information when taken by themselves. Thus, it is reasonable that indicators and global methodologies are to be found. Rui Cunha Marques 32

33 Advantages of PI application v v The use of performance indicators can have different goals, according to the entity which is applying them: Firms: ü ü ü ü ü ü Compulsory data collection and management; Faster decision-making process; Gives more power to the decision makers, making the justification of the decisions taken and the establishment of priorities easier; Pro-active management; Identification of weaknesses and strengths of the system; Implementation of an objective-oriented management as it defines targets for the PIs; ü Finally, makes it easier to carry out eternal and internal auditing and the activities results become more transparent.

34 Advantages of PI application v Regulatory commissions: ü Key-tool for the supervision of the quality of service provided by the operator. Water supply interruptions v PIs are also important for the entities responsible for the policies adopted in the sector at national, regional or local levels, for the users, financial organisms and supranational organizations. Rui Cunha Marques 34

35 Methodology Performance measure Measurement criteria Computation of indicator Eplanatory factors analysis Comparison with reference values Controlable Non-controlable Ecellent performance Medium performance Poor performance Ecelence management TQM Improvement process Best practices Active managerial Correction procedures

36 Methodologies Performance Evaluation Parametric Approach Non Parametric Approach Non-frontier Methods Frontier Methods Non-frontier Methods Frontier Methods Simple Regression (OLS) COLS Stochastic frontier (SFA) Partial measures of productivity Inde numbers DEA FDH Partial frontier methods Rui Cunha Marques 36

37 Global productivity measures Total factor productivity (TFP): TFP Weighted Sum of Outputs Weighted Sum of Inputs Linear relationship between inputs and outputs; Constant weights for all the elements being compared; Different results can be reached according to the composition of weights adopted. M i 1 N j1 a b i j y i j Productivity change measures: TFP t, t 1 TFPt 1 f y t 1, yt TFP g, t t 1 t The inputs and outputs choice and the way they can be aggregated characterize the different indees that can be built; They are non parametric and non-frontier measures of performance evaluation, called Inde Numbers. Rui Cunha Marques 37