Industrial Management & Data Systems

Supply chain performance measurement system using DEA modeling

Wai Peng Wong Kuan Yew Wong

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Wai Peng Wong Kuan Yew Wong, (2007),"Supply chain performance measurement system using DEA
modeling", Industrial Management & Data Systems, Vol. 107 Iss 3 pp. 361 - 381
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Supply chain performance

measurement system
using DEA modeling
Wai Peng Wong

Supply chain
performance
measurement
361

Department of Industrial and Systems Engineering,

National University of Singapore, Singapore, and

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Kuan Yew Wong

Faculty of Mechanical Engineering, Universiti Teknologi Malaysia,
Skudai, Malaysia
Abstract
Purpose This paper aims to illustrate the use of data envelopment analysis (DEA) in measuring
internal supply chain performance.
Design/methodology/approach Two DEA models were developed the technical efficiency
model and the cost efficiency model. The models are further enhanced with scenario analysis to derive
more meaningful business insights for managers in making resources planning decisions.
Findings The information obtained from the DEA models helps managers to identify the inefficient
operations and take the right remedial actions for continuous improvement. More importantly, the
opportunity cost (forgone profit) calculated serves as a good reference to managers to make efficient
decisions on resource allocations.
Research limitations/implications Results are based on the deterministic data set. Future
enhancement of the study would be to look into the possibility of modeling DEA in a stochastic supply chain
environment (non-deterministic) due to the fact that supply chain operates in a dynamic environment.
Practical implications The proposed DEA-based approach provides useful managerial
implications in the measurement of supply chain efficiency. The study proves the usefulness of
DEA as a decision-making tool in supply chain.
Originality/value This paper provides useful insights into the use of DEA as a modeling tool to
aid managerial decision making in measuring supply chain efficiency.
Keywords Data analysis, Supply chain management, Performance measures, Modelling,
Process efficiency
Paper type Research paper

1. Introduction
Supply chain management has become one of the most frequently discussed topics in the
business literature. According to Simchi-Levi et al. (2003), supply chain management is a
set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses,
and stores, so that merchandise is produced and distributed at the right quantities, to the
right locations, and at the right time, in order to minimize system wide costs while
satisfying service level requirements. Supply chain is defined as a combinatorial system
consisting of four processes namely plan, source, make and deliver, whose constituent
parts include material suppliers, production facilities, distribution services and customers
linked together via the feed forward flow of materials and the feedback flow of information
(Stevens, 1989; Christopher, 1998). Effective management of an organizations supply

Industrial Management & Data

Systems
Vol. 107 No. 3, 2007
pp. 361-381
q Emerald Group Publishing Limited
0263-5577
DOI 10.1108/02635570710734271

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chains has proven to be a very effective mechanism for providing prompt and reliable
delivery of high-quality products and services at the least cost. This is an essential corner
stone for the organizations to develop a sustainable competitive advantage and to remain
at the fore front of excellence in a level playing market field. To achieve an efficient supply
chain, performance evaluation of the entire supply chain is extremely important. This
means utilizing the combined resources of the supply chain members in the most efficient
way possible to provide competitive and cost-effective products and services. Hence,
overall supply chain efficiency is defined as the efficiency which takes into account the
multiple performance measures related to the supply chain members, as well as the
integration and coordination of the performances of those members. As such, managing
this entire/overall supply chain efficiency is indeed a very difficult and challenging task.
Ross (1998) had even mentioned that, even within large corporations such as Sears and
General Motors which had large supply chain systems, the entire supply chain
performance measurement systems were not in existence.
It is important to emphasize that the primary objective of this paper is to provide a
realistic framework within which to study supply chain performances. An illustrative
example with managerial implications is discussed. Hence, incomplete and unavailability
of data at present in many organizations may render the model inoperable if a full scale of
supply chain efficiency measurement is considered. As such, this paper limits the context
of supply chain efficiency within the direct suppliers and the customer relationships.
In other words, only two tiers of the supply chain are considered. This paper aims to
measure supply chain performance within the manufacturing firm by incorporating all of
its value chain activities. It is essential to note that the intention is not purely focusing on the
manufacturing processes, but rather the supply chain activities within the manufacturing
organization. Although, the study does not incorporate the full length of the value chain
which is from the suppliers suppliers to ultimate customer, the measure could still be
addressed as the supply chain efficiency within the internal organization context.
This study will develop a tool to measure internal supply chain efficiency by using
data envelopment analysis (DEA). DEA is a nonparametric method based on linear
programming technique to evaluate the efficiencies of the analyzed units. DEA can
measure multiple inputs and outputs, as well as evaluate the measures quantitatively
and qualitatively, hence enabling managers to make reasonable judgement on the
efficiency of the analyzed units. In this paper, we propose a DEA model to evaluate the
supply chain efficiency in different companies. This model helps management identify
the inefficient operations and provide remedies on how to improve its supply chain
efficiency. In general, the paper is organized as follows. Firstly, we give a brief
description on some of the traditional ways of measuring supply chain performance and
problems associated with them, followed by a review on DEA and its application in
supply chain. Then, we explain the methodology and DEA models developed to measure
supply chain efficiency. This is followed by an illustration on the application of the
models in 22 companies. The results obtained are discussed and the paper culminates
with managerial implications, conclusions and some directions for future research.
2. Literature review
2.1 Difficulties in measuring supply chain efficiency
Traditionally, the supply chain is usually managed as a series of simple,
compartmentalized business functions. The traditional supply chain was normally

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driven by manufacturers who managed and controlled the pace at which products were
developed, manufactured and distributed (Stewart, 1997). At such, measuring supply
chain efficiency during traditional times could be carried out fairly easily in a simple
manner. Generally, the efficiency is measured by taking the ratio of revenue over
the total supply chain operational costs. However, in recent years, new trends have
emerged in the efficiency measurement, where, customers have forced increasing
demands on manufacturers for quick order fulfillment and fast delivery. This has made
the supply chain efficiency difficult to be measured (Stewart, 1997). In addition to
the usual financial measures used to measure efficiency, the supply chain performance
now also needs to take into consideration other specific indicators such as the delivery
rate and percentage of order fulfillment. This measurement is further complicated by
the influence of manufacturing capacity and other influential operational constraints.
In view of the increasing performance measures in supply chain, not many companies
will know how to gauge the performance of their supply chain. The rise of multiple
performance measures has rendered the efficiency measurement task difficult and
unchallenging. Hence, a tool to effectively measure the supply chain efficiency is
greatly needed. Yee and Tan (2004), Rao (2006) and Takala et al. (2006) further
supported that in view of the current level of complexity to address the performance
measurement problem, it involves more sophisticated tools. Though, the measurement
tool only serves as a stepping stone for companies to achieve more strings of successes
in the long-term, the foundation of measurement has to be laid out robustly by firstly
developing a suitable and useful tool for supply chain performance measurement. This
tool will not only perform the quantitative reasoning but will also provide insights to
manager in the qualitative perspective of strategic decision making.
2.2 Description of traditional methods to measure supply chain efficiency
Tools used to measure supply chain efficiency had received numerous attentions.
The spider or radar diagram and the Z chart are some of the popular tools used to
measure supply chain efficiency. These tools are based on gap analysis techniques and
they are very graphical in nature. Although the graphical approaches make them easy to
understand, it causes inconveniences to the analysts if multiple elements have to be
integrated into a complete picture. In other words, it is not feasible to measure the
efficiency using these tools when there are multiple inputs or outputs. Another well-known
method used is the ratio. It computes the relative efficiencies of the outputs versus the
inputs and is easily computed. However, a problem with comparison via ratios is that
when there are multiple inputs and outputs to be considered, many different ratios would
be obtained and it is difficult to combine the entire set of ratios into a single judgement.
The evaluation of supply chain efficiency needs to look into multidimensional
construct as the results of the evaluation is important for fine-tuning an organization
current operations and creating new strategies to keep up with competitions (Helo,
2005; Wagner et al., 2002; Charnes and Cooper, 1978). Single output to input financial
ratios such as return on sales and return on investment may not be adequate for use as
indices to characterize the overall supply chain efficiency. Hence, the traditional tools
discussed earlier, which do not take into account multiple constructs, would not be able
to provide a good measure of supply chain efficiency.
Since, a companys supply chain efficiency is a complex phenomenon requiring
more than a single criterion to be characterized, a number of studies have suggested

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364

that a multi-factor performance measurement model may be applied for the evaluation
of supply chain efficiency (Zhu, 2000). The development of a multi-factor performance
measure, which reflects the efficiency of functional units and technologies
implemented in a supply chain, is important to policy makers by knowing how far a
particular industry or company can be expected to increase its multiple outputs and
decrease its input level through the improvement of its efficiency. The research
direction on this area has shown much interest in the DEA. The next section will give
a review on DEA.
2.3 Review of DEA and its applications in supply chain
DEA was first introduced by Charnes and Cooper (1978) as a linear programming
(LP)-based methodology for performing analysis of how efficiently a company
operates. Its analyzed units are denoted as DMU, which stands for decision-making
units. It is a non parametric programming approach to frontier estimation. In other
words, it means DEA does not require the existence of a particular function to specify
the relationships or tradeoffs among the performance measures in the computation
of efficiency and it utilizes the concept of efficient frontier as an empirical standard of
excellence. These advantages of DEA enable managers to evaluate any measures
efficiently as they do not need to find any relationship that relates them. In addition,
the concept of efficient frontier proves to be a valid measure of performance
comparison (Farrell, 1957).
DEA is able to measure multiple inputs and outputs, which means it can operate as
a multi criteria decision making (MCDM) tool. In comparison of this inherited feature of
DEA to other MCDM tools such as the analytic hierarchy process (AHP) (Chan et al.,
2004; Chou et al., 2005), DEA does not require assigned numeric weights or modeling
preferences for analysis, although these could be introduced if/when desired. This
helps to prevent discrimination of criteria used in the analysis based on different
perspectives of analysts. Similarly, incorporating decision makers value-judgements
into the DEA approaches provides comparable results to those found by the traditional
MCDM approaches. Hence, the advantages of DEA compared to other MCDM methods
are it requires less information from decision makers and analysts and it provides
ranked alternative valuations that may be useful for some decision makers.
A comparison analysis of DEA as a discrete alternate MCDM tool has been suggested
by Sarkis (2000) and Seydel (2006).
Past literature on DEA has shown that DEA has been widely applied in measuring
efficiency particularly in external benchmarking issues. DEA has been utilized for
selection of partners for benchmarking in telecommunications industry (Collier and
Storbeck, 1993) and in travel management (Bell and Morey, 1995). Collier and Storbeck
(1993) used standard DEA approach, which calculate technical efficiencies for
determining benchmarking partners. Bell and Morey (1995) used DEA to identify
appropriate benchmarking partners that use a different mix of resources that are more
cost efficient compared to that used by the firm. Other areas on external benchmarking
using DEA are the banking and finance industry (Barr and Seiford, 1994) and grocery
industry (Athanassopoulos and Ballantine, 1995).
DEA has also been applied in addressing internal benchmarking issues (Schefcyzk,
1993; Sherman and Ladino, 1995; Sarkis and Talluri, 1996; Humphreys et al., 2005).
In addition, Rickards (2003) also showed the importance of using DEA in evaluating

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balanced scorecards and the dependency on this tool is increasing in order to

maintain its position as a strategic management tool. Dey and Ogunlana (2004) and
Baccarini et al. (2004) also highlighted that with the increased risk analysis and project
management, DEA could be suitably applied as a decision support tool in project
selections. The authors would like to highlight to the readers that it is not the intention
of this paper to provide a full length of past literature on DEA. Interested readers
are advised to refer to Seiford (1996) for a detailed literature review on DEA and its
application.
The immense applications of DEA in internal and external benchmarking in the past
literatures apparently showed that DEA is justified to be used as the efficiency
measurement tool. This is because benchmarking of performances stems from the
foundations of efficiency measurement. The basic task in carrying out a benchmarking
activity is to measure the efficiency and then followed by the ranking comparison of the
efficiency measured. Although DEA models have been vastly applied in various
applications based on the past literature, no study investigating their applicability in
supply chain performance measurement has so far been reported. It is, therefore,
worthwhile to extend the traditional DEA models into the supply chain management. This
study aims to develop a DEA model to measure internal supply chain efficiency and
present a case study of supply chain performance measurement using the proposed DEA
approach. Wong and Wong (2006) explained the motivation of using DEA as a supply
chain performance measure tool, by giving ample evidences, literature supports and
reasons on the suitability of DEA as a decision-making tool in supply chain management.
3. Methodology
The methodology used in this paper is DEA. Two DEA models will be constructed to
measure supply chain efficiency. DEA is suitable to be used in measuring supply chain
efficiency because it can handle multiple inputs and outputs and it does not require
prior unrealistic assumptions on the variables which are inherent in typical supply
chain optimization models (i.e. known demand rate, lead time, etc.).
The methodology section will firstly present the foundations of the DEA approach.
Then, it will be followed by the development of the models which will be applied to
measure supply chain efficiency. As DEA is very mathematical in nature, the
explanation of the models is presented by having the practitioners in mind and is
simplified to ease the understanding of the readers. Then, it will discuss the underlying
meanings and implications of each model to managerial decisions making. Lastly, it
will be followed by a brief explanation on how the constructed models can be enhanced
to give a more meaningful interpretation to practitioners or managers.
3.1 Foundations of DEA and models construction
DEA is a mathematical programming technique that calculates the relative efficiencies
of multiple DMUs based on multiple inputs and outputs. DEA measures the relative
efficiency of each DMU in comparison to other DMUs. An efficiency score of a DMU is
generally defined as the weighted sum of outputs divided by the weighted sum of
inputs, while weights need to be assigned. DEA model computes weights that give the
highest possible relative efficiency score to a DMU while keeping the efficiency scores
of all DMUs less than or equal to 1 under the same set of weights. The fractional form
of a DEA mathematical programming model is given as follows:

Supply chain
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measurement
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IMDS
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t
X

maximize h0

r1
m
X

ur yrj0
vi xij0

i1

366

subject to:
t
X

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r1
m
X

ur yrj
# 1;

j 1; . . . ; n

vi xij

i1

ur # 1;

r 1; . . . ; t

vi # 1;

i 1; . . . ; m

where ur, the weight for output r; vi, the weight for input i; yrj, the amount of output r of
DMU j; xij, the amount of input i of DMU j; t, the number of outputs; m, the number of
inputs; n, the number of DMUs; and 1, a small positive number.
The objective function of equation (1) seeks to maximize the efficiency score of a
DMU j0 by choosing a set of weights for all inputs and outputs. The first constraint set
of equation (1) ensures that, under the set of chosen weights, the efficiency scores of all
DMUs are not more than 1. The second and third constraint sets of equation (1) ensure
that no weights are set to 0 in order to consider all inputs and outputs in the model.
A DMU j0 is considered efficient if the objective function of the associated (equation (1))
results in efficiency score of 1, otherwise it is considered inefficient.
By moving the denominator in the first constraint set in equation (1) to the
right-hand side and setting the denominator in the objective function to 1, (equation (1))
can be converted into a LP problem as follows:
t
X
ur yrj0
Maximize h0
r1

subject to:
m
X

vi xij0 1

i1
t
X
r1

ur # 1;

ur yrj 2

m
X

vi xij # 0;

j 1; . . . ; n

i1

r 1; . . . ; t

vi # 1;

i 1; . . . ; m

The dual model of equation (2) can be given as follows, which is equivalent to the
envelopment form of the problem:
!
m
t
X
X
2

si
sr
Minimize u 2 1
i1

r1

lj xij s2
i uxij0

i 1; . . . ; m

Supply chain
performance
measurement

lj yrj 2 s
r yrj0 ;

r 1; . . . ; t

367

subject to:
n
X
j1
n
X
j1

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lj ; s2
i ; sr $ 0

where u; lj ; s2
i ; sr are the dual variables. The variable u is the technical efficiency

score which we want to calculate, and s2

i ; sr are the input slacks and output slacks,
respectively. Output slacks indicates how much shortages in the outputs, while input
slacks indicates how much surpluses in the inputs. The slacks and efficiency are
closely related, as the prior helps to decide on the later. Based on equation (3), a DMU j0
is efficient if and only if, in the dual optimal solution, u * 1, and s*i 2 s*r 0 for all
i and r, where an asterisk denotes a solution value in an optimal solution. In this case,
the optimal objective function value of equation (3) is 1, and the corresponding primal
problem in equation (2) also has an optimal objective function value of 1. For an
inefficient DMU j0, appropriate adjustments to the inputs and outputs can be applied in
order to improve its performance to become efficient. The following input/output
adjustments (improvement targets) would render it efficient relative to other DMUs:
*

x0ij0 u xij0 2 s2
i ;
*

y0rj0 yrj0 s
r ;

i 1; . . . ; m:
r 1; . . . ; t:

4
5

From the duality theory in LP, for an inefficient DMU j0, l*i . 0 in the optimal dual
solution also implies that DMU i is a unit of the peer group. A peer group of an
inefficient DMU j0 is defined as the set of DMUs that reach the efficiency score of 1
using the same set of weights that result in the efficiency score of DMU j0.
The improvement targets given in equations (4) and (5) are obtained directly from
the dual solutions. This is because the constraints in equation (3) relate the levels of
outputs and scaled inputs of DMU j0 to the levels of the outputs and inputs of a
composite DMU formed by the peer group. These improvement targets are considered
input-oriented because the emphasis is on reducing the levels of inputs to become
efficient. If outputs need to be increased during the efficiency improvement,
output-oriented adjustments can be used. In this study, it is appropriate to use input
oriented because we want to evaluate the technical efficiency based on a given set of
inputs, while keeping at least the present output levels. In addition, managers also have
more control over the inputs compared to the outputs.
The dual model of the above formulation is also known as the envelopment model.
It has the benefit of solving the LP problem more efficiently than the primal model
when the number of DMUs is larger than the total number of inputs and outputs, which
is normally the case in applying DEA. More importantly, the dual variables provide
improvement target for an inefficient DMU to becomePefficient as compared to the
n
efficient DMUs. An additional convexity constraint
i1 lj 1 can be added to

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368

equation (3) to yield a measure of the pure technical efficiency if the constant
return-to-scale (Banker et al., 1984) assumption does not apply.
The above model (equation (3)) is used to calculate the technical efficiency. This
model can also be referred to as the technical efficiency model. Next, we will cast in
the cost (price) information into the model to consider the behavioral objective which is
cost minimization. With this new model, we can measure both technical and allocative
efficiencies. The cost efficiency model is shown below:
m
X
cijo xi
minimize
i1

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subject to:
xi $

n
X

xij lj

i 1; . . . ; m

j1

yrjo #

n
X

yrj lj

r 1; . . . ; t

j1

lj $ 0

where cijo is the unit cost of the input i of DMU jo which may vary from one DMU to
another. The total cost efficiency (CE) of the DMU jo would be calculated as:
CE

c0ijo x0ij0
c0ijo xij0

This is the ratio of minimum cost to the observed cost. One can then calculate the
allocative efficiency (AE) by dividing the technical efficiency (TE) from the cost
efficiency as shown in equation (8) below. The TE value is obtained from the technical
efficiency model (equation (3)) and substituted into equation (8):
CE
8
AE
TE
The AE measure includes slacks which reflect an inappropriate input mix (Ferrier and
Lovell, 1990). This information together with the opportunity cost calculated are
important to managers because they serve as a basis for decision making on resources
allocation and help in strategic action planning for continuous improvement.
Both the TE and CE models were derived carefully from a thorough literature
review and were checked by experts to ensure the validity of the models. The
discussion of the DEA models presented here is brief, with relatively little technical
details. More detailed reviews of the models are presented by Seiford and Thrall (1990),
Lovell (1993), Ali and Seiford (1993) and Charnes et al. (1994). A comprehensive review
of the DEA can also be found in Seiford (1996).
3.2 Underlying implications of the models
Having constructed the two DEA models for measuring supply chain efficiency, we will
next discuss the underlying meanings of each model and explain what the solutions of
each model imply to managers.

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As mentioned earlier, the technical efficiency model will give us the TE and the CE
model will give us the CE. The AE can then be obtained after the technical and cost
efficiency are known. The technical efficiency reflects the ability of a firm to obtain
maximum outputs from a given set of inputs, and AE reflects the ability of a firm in
using the inputs in optimal proportions, given their respective prices. From the TE
model, besides the TE scores, managers could also know the ranks and the inputs and
outputs efficient targets. This information would be useful to managers as they could
then tune their resources according to the efficient target level. The cost efficiency
which is provided by the cost efficiency model is equivalent to the opportunity cost.
Opportunity cost loss indicates the amount of profit that has to be sacrificed if the
input is tuned in the direction set by the analysts based on the calculated efficiency
score. Managers will always want to reduce the opportunity loss to the lowest possible
value. By knowing the opportunity cost, AE as well as the TE indexes, it will be more
meaningful for decision-making purposes. Managers will have better information on
how to allocate resources in order to minimize cost and foregone profit and at the same
time maximize the efficiency of the supply chain.
3.3 Enhancement of the models
The results obtained from the DEA models can be enhanced and made more meaningful
by conducting the what-if scenario analysis on the resources. This would make the
models more useful in providing additional information to the decision makers.
By conducting the scenario analysis, all the decision variables in the models (TE, CE, AE
and opportunity cost) could be calculated in relative to any proportional changes to the
inputs. This feature is important to managers as they need to know and understand
what will happen if they only tune the resources up or down to a certain proportion, not
meeting the final target value. Furthermore, some inputs are robust and could be hardly
decreased to the required target input level. Hence, by conducting the scenario analysis,
managers would be able to gauge what is the best cut off point for fine tuning, in order
to achieve the underlying objectives and fulfill the operational constraints.
The next section will explain the overall theoretical framework used in this study,
followed by an illustrative example of measuring supply chain efficiency.
4. The overall conceptual model for measuring internal supply chain
efficiency
Figure 1 shows the conceptual model used in this study. The model is constructed
based on the consideration of measuring internal supply chain performance. The
measurement variables used are the supply chain performance metrics which
encompass a wide range of measures ranging from financial to specific supply chain
operational measures. The input and output variables used are categorized according
to the performance metrics listed in the supply chain operations reference (SCOR).
SCOR is chosen because it is the first cross-industry framework for evaluating and
improving enterprise-wide supply chain performance and management (Stewart,
1997). The initialization of SCOR stemmed from the needs to develop well-defined and
independent criteria to measure supply chain performance and the requirement of a
common language due to the presence of many partners in the process. The SCOR uses
a process reference model that includes analyzing the current state of a companys
processes and its goals, and quantifying operational performance and comparing it to

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Outputs
Revenue
On-time delivery
rate
Data
Envelopment
Analysis (DEA)
Model

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370

Figure 1.
A conceptual model for
measuring internal supply
chain efficiency

Internal Supply
Chain Efficiency

Inputs
Internal
manufacturing
capacity
Cycle Time
Cost

benchmark data. It is essential that the present attempt of this paper is to focus on
developing a framework to measure internal supply chain efficiency and for the sake of
conciseness; readers may refer to Stewart (1997) for a comprehensive explanation on
SCOR. There are a total of four levels of supply chain management in SCOR. Level 1
consists of the top level metrics which encompasses four basic processes plan,
source, make, deliver and extends across all parts of the manufacturing and delivery
process. Level 2 consists of the process categories and serves as the platform for
companies to implement the operations strategy. Level 3 encompasses the process
element levels and it defines the companys ability to compete successfully in the
chosen markets. This is also the level where companies fine tune their operations
strategy. Lastly, level 4 is the implementation level, where specific supply chain
management practices to adapt to changing business conditions were defined. The
variables used in the conceptual model as shown in Figure 1 corresponds to some of the
metrics in levels 1-3. As the objective of this paper is to provide an analytical
framework for supply chain performance measurement, the level 2 and 3 metrics will
be chosen to serve as proxies for the level 1 metrics. This supports the papers intention
which is measuring internal supply chain efficiency (covering all the supply chain
activities within the manufacturing organization) rather than purely focusing on the
manufacturing operations itself.
The SCOR metrics used in this study include key areas such as financial measures
and operational measures. The operational measures can be further broken down into
specific measures which are delivery performance, order fulfillment and production
flexibility. DEA is used as a tool to analyze these variables. The objective of this model
is to evaluate the supply chain efficiency. Table I illustrates the output and input
variables.
Table I.
Input and output
variables used for
analysis in the DEA
models

Measures

Output variables

Input variables

Financial measures
Supply chain operational
measures

Revenue
On-time delivery rate
(ODR)

Cost
Internal manufacturing capacity (IMC),
cycle time

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4.1 The output variables

(1) Financial measures revenue. This is a common measure of efficiency in
various profit-oriented organizations.
(2) Operational measures on-time delivery rate (ODR). This is a common
performance attribute for supply chain delivery reliability. It refers to
the performance of the supply chain in delivering the correct product, to the
correct place, at the correct time, in the correct condition and packaging, in the
correct quantity, and with the correct documentation to the correct customer.
4.2 The input variables
(1) Financial measures cost. This is the performance attribute for supply chain
costs, i.e. the costs associated with operating the supply chain.
(2) Operating measures.
.
Cycle time (CT) (order fulfillment lead times). It is the performance attribute
for supply chain responsiveness. It refers to the velocity at which a supply
chain provides products or services to the customers.
.
Production flexibility or capacity (internal manufacturing capacity IMC).
This is the performance attribute for supply chain flexibility. It refers to
the agility of a supply chain in responding to marketplace changes to gain or
maintain competitive advantage.
5. Results and discussion
To make matters more concrete in the use of the proposed supply chain efficiency
model, a survey was designed to collect inputs and outputs variables data from various
companies. The companies from the semiconductor sector were selected. The sampling
source for the companies was obtained from the Penang Development Corporation
(PDC), Malaysia. These companies have their manufacturing plants located in the
Penang Free Trade Zone. There are about 50 semiconductor companies listed in
the PDC database and all these companies are selected for this study. By having the
similar logistic distribution network and operating in the same industry, supply chain
efficiencies will be made more comparable using DEA. This is due to the fact that DEA
measures the relative performance of DMUs on the basis of the observed operating
practice in a sample of comparable DMUs. In other words, the DMUs should be
homogenous units. Data collection of the input and output variables was done via
different methods. First of all, revenue and supply chain cost were obtained from the
companies financial reports. Secondly, IMC, CT and ODR were collected from
the questionnaires which were mailed to the supply chain managers. Thirdly, site
interviews and telephone calls were made to follow up on the questionnaires and to
validate their answers. We received responses from 30 companies resulting in a
response rate of 60 percent. Of these responses, 22 had all items completed and were
usable for this study. Since, the data are used to compute the rankings of relative
efficiency, the low response rate does not affect the accuracy of the DEA outcomes.
These data were then put into the DEA models and the solutions were obtained using
linear programming software package (LINDO 6.1).
The first part of the study examines the technical efficiency of the companies.
The descriptive statistics for the inputs and outputs are given in Table II.

Supply chain
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372

Table II.
Descriptive statistics on
inputs and outputs data

Table III.
Technical, cost and
allocative efficiency

The average values of IMC is 24.6 days, CT is 24.3 hour, cost is USD 50 million,
revenue is USD 1.1 billion and ODR is 95.8 percent. It is shown that the standard
deviation of the CT is quite large. This may be due to the fact that CT varies among
different companies.
The total number of DMUs which are being evaluated is 22. Table III shows the
technical, cost and allocative efficiency scores for all the DMUs.
As shown in Table III, the results indicate that there is a total of six DMUs which are
technically efficient (having the efficiency scores of 1.0) but only two DMUs which are
cost as well as allocative efficient. The technically efficient DMUs are DMU 2, 7, 8, 15, 16
and 21 while the cost and allocative efficient DMUs are only DMU 2 and 7. (DMU 2 and 7
have TE CE AE 1). It is important to highlight that technical efficient DMUs
are not necessarily cost and allocative efficient. As the cost efficiency model has a higher
discriminatory power, it is able to further differentiate the technical efficient DMUs.
Table IV shows the ranking and target peers for each DMU. The selection of peers
for each DMU is based on a linear combination of weights given to the nearest efficient

Max
Min
Average
SD

IMC (days)

CT (hour)

Cost (billion USD)

Revenue (billion USD)

ODR (percent)

30
3
24.59
9.75

144
2
24.32
27.36

0.57
0.01
0.05
0.12

3.8
0.021
1.13
0.88

99
92
95.77
2.02

DMU No.

TE

CE

AE CE/TE

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

0.20
1.00
0.96
0.99
0.99
0.97
1.00
1.00
0.66
0.89
0.95
0.73
0.53
0.96
1.00
1.00
0.97
0.96
0.71
0.51
1.00
0.97

0.06
1.00
0.20
0.20
0.20
0.20
1.00
0.26
0.20
0.24
0.21
0.22
0.18
0.20
0.37
0.69
0.20
0.18
0.22
0.17
0.27
0.21

0.32
1.00
0.21
0.21
0.21
0.21
1.00
0.26
0.30
0.27
0.22
0.30
0.34
0.21
0.37
0.69
0.21
0.19
0.30
0.34
0.27
0.22

Notes: TE: technical efficiency; CE: cost efficiency; AE: allocative efficiency

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DMU No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Rank
22
1
17
13
12
14
1
6
18
7
11
8
19
16
4
3
14
20
9
21
5
10

Reference set (l)

2
2
2
2
2
2
7
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2

(1)
(1)
(0.9694)
(1)
(1)
(0.9796)
(1)
(0.7438), 7 (0.2664)
(0.9694)
(0.9796)
(0.9388)
(1)
(0.9796)
(0.9354), 7 (0.0340)
(0.9694)
(0.9388)
(0.9796)
(0.9694)
(0.9796)
(0.9388)
(0.9694)
(0.9592)

DMUs (closest proximity in terms of operations and characteristics). Thus, this distinct
feature of DEA enables the managers to implement a more realistic and achievable
improvement plan for the supply chain. In contrast to other MCDM methods which do
not provide the information of peers in efficiency measurement, the effort in choosing a
realistic benchmark (role model) company could be more difficult. The risk of selecting
a wrong benchmark is higher, in which this will further lead to deterioration of
employees determination and efforts towards improving the supply chain efficiency
due to unrealistic and unachievable output targets. From Table IV, for instances, the
target peers for DMU 8 is a linear combination of peers 2 and 7, where the weights in
this linear combination are the lambdas: 0.7438 and 0.2664, respectively. For the
efficient DMUs, their peers are themselves.
In addition to providing relative efficiency scores and rankings, Table V also
provides results on the efficient inputs, outputs and cost targets. The adjustment target
values are obtained using equations (4) and (5) after knowing the slack variables values
from the model. For instances, the inefficient DMUs such as DMU 1, 13 and 20 which
have low technical, cost and allocative efficiency scores have to adjust their inputs
accordingly in order to be efficient. DMU 1 has to reduce its IMC from 28 to 3 days, CT
from 144 to 15.43 hour and cost from 0.06 billion USD to 0.01 billion USD. DMU 13 has
to reduce its IMC from 30 to 7.84 days, CT from 30 to 7.84 hour and cost by 33.3
percent. Similarly, for DMU 20, its efficient target inputs are IMC (7.51 days), CT (7.51
hour) and cost (0.02 billion USD). For the technically efficient but cost and allocative
inefficient DMUs such as DMU 8, 15, 16 and 21, adjustments only need to be carried out
on their inputs resources. No adjustments in cost are needed. For instances, for DMU 8,
it only needs to reduce its IMC from 20 to 6.73 days and CT from 24 to 8.1 hour in order

Supply chain
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373

Table IV.
Ranking and target
benchmarks for all DMUs

Table V.
Efficient inputs, outputs
and cost targets for each
DMU

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

28
3
30
30
30
30
5
20
30
30
30
30
30
30
5
5
30
30
30
30
25
30

144
8
24
24
24
24
8
24
24
15
20
20
30
24
24
10
24
30
20
30
15
20

0.06
0.10
0.01
0.01
0.01
0.01
0.57
0.01
0.02
0.02
0.01
0.02
0.03
0.01
0.01
0.03
0.01
0.01
0.03
0.03
0.01
0.01

Original inputs
CT
Cost
(hour)
(billion USD)
0.60
2.00
0.46
0.30
0.42
0.02
3.80
2.50
1.50
0.69
0.70
0.50
0.50
2.00
0.50
0.50
0.50
1.50
1.60
1.20
1.60
1.50

98
98
95
98
98
96
98
99
95
96
92
98
96
95
95
92
96
95
96
92
95
94

Original outputs
Revenue
ODR
(billion USD)
(percent)
3.00
3.00
13.57
10.00
10.00
9.80
5.00
6.73
9.69
15.67
11.27
12.00
7.84
9.69
2.91
3.76
9.80
7.76
11.76
7.51
12.93
11.51

IMC
(days)
15.43
8.00
7.76
8.00
8.00
7.84
8.00
8.08
7.76
7.84
7.51
8.00
7.84
7.76
13.96
7.51
7.84
7.76
7.84
7.51
7.76
7.67

0.01
0.10
0.01
0.01
0.01
0.01
0.57
0.01
0.01
0.02
0.01
0.01
0.02
0.01
0.01
0.03
0.01
0.01
0.02
0.02
0.01
0.01

Efficient input target

CT
Cost
(hour)
(billion USD)

0.60
2.00
0.46
0.30
0.42
0.02
3.80
2.50
1.50
0.69
0.70
0.50
0.50
2.00
0.50
0.50
0.50
1.50
1.60
1.20
1.60
1.50

98.00
98.00
95.00
98.00
98.00
96.00
98.00
99.00
95.00
96.00
92.00
98.00
96.00
95.00
95.00
92.00
96.00
95.00
96.00
92.00
95.00
94.00

Efficient output target

Revenue
ODR
(billion USD)
(percent)

374

DMU No.

IMC
(days)

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to be inefficient. In a similar manner, the target adjustments for other inefficient DMUs
can be interpreted from Table V. Efficient DMUs which are DMU 2 and 7 do not need to
adjust their inputs and cost. This piece of information on target adjustments is
invaluable to managers because it helps to identify the sources of inefficiency in the
supply chain sites. By knowing the sources of inefficiencies, managers could then focus
the improvement efforts in those areas to improve the supply chain performance.
Table VI shows the opportunity cost for each DMU. It was found that, for efficient
DMUs (DMU 2 and 7), there are no opportunity cost loss. This means that the inputs
mix of these DMUs are allocated efficiently. On the other hand, there is a relative
amount of opportunity cost loss incur for the inefficient DMUs. For instances, for DMU
3, based on the existing inputs, outputs and cost level, it will incur a loss of 0.2 billion
USD. If adjustments are made onto its inputs to reach the efficient inputs target level,
DMU 3 can achieve a projected profit of 0.24 billion USD. Hence, there is an
opportunity cost of 0.45 billion USD for DMU 3 to decide on whether remedial actions
should be undertaken or not. Similarly, for DMU 8, existing level of resources will
render a profit of 2.06 billion USD. This profit could actually be increased to 2.35 billion
USD if DMU 8 further adjusts its inputs to the efficient inputs level as mentioned
earlier. This remedial action denotes the opportunity cost for DMU 8. The opportunity
cost serves as invaluable information to managers in decision making. This piece of
information indicates the amount of profit that has to be sacrificed if the input is tuned
in the direction set by the analysts based on the calculated efficiency score. Hence, by
knowing the opportunity cost, managers will be able to make the best allocation of the
resources, with the objectives of minimizing cost and loss while at the same time
maximizing the supply chain efficiency.

Supply chain
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measurement
375

DMU No. Total profit (billion USD) Projected profit (billion USD) Opportunity cost (billion USD)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

2 9.72
0.90
2 0.20
2 0.24
2 0.12
2 0.52
2 3.61
2.06
0.42
2 0.21
0.20
2 0.50
2 1.30
1.46
0.21
0.05
2 0.04
0.90
0.10
2 0.60
1.20
1.00

2 0.51
0.90
0.24
0.12
0.24
2 0.16
2 3.61
2.35
1.15
0.22
0.51
0.10
0.03
1.83
0.33
0.16
0.32
1.34
1.01
0.75
1.39
1.31

9.21
0.00
0.45
0.36
0.36
0.36
0.00
0.29
0.73
0.43
0.31
0.60
1.33
0.37
0.12
0.11
0.36
0.44
0.91
1.35
0.19
0.31

Table VI.
Total profit, projected
profit and opportunity
cost for each DMU

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376

Next, scenario (sensitivity) analysis is conducted on the allocation of resources to

evaluate what will happen if the resources are fine tuned according to certain
proportion. This is very applicable in the situation where, the inputs are robust and
could not be tuned to the required efficient target value. At such, managers need to
know where the cut off point is. Table VII shows an example of the sensitivity analysis
being carried out on an inefficient DMU (DMU 1) by varying its input (IMC) and cost
proportionately. This is implemented by using the Solver Table in Excel. Cost is
adjusted proportionately by 10 percent in an increasing and decreasing trend starting
from the original value of 0.06. Hence, the value ranges from 0.006 to 0.09, which are
shown in the top row outside of the demarcated box. Input IMC is also varied by
10 percent in a similar manner and its original value is 28. Hence, IMC consists of the
value from 2.8 to 42. These values are shown in the most left column outside the
demarcated box. The values inside the box are the efficiency scores. It is found that, as
long as the cost is decreased to 10 percent from its original value, DMU 1 is able to
achieve the efficiency score of 1. For other values of the cost, the decision maker would
have to consider the input IMC. Increase in cost together with the increase in input IMC
will cause the efficiency score to become less than 1. The opportunity cost in relative to
each level of changes in resources is then calculated. At such, managers would be able
to obtain the best cut off point for allocation of resources in order to fulfill the cost
minimization objective, while minimizing the opportunity cost loss.
Following this, a graph depicting the confidence region of the efficiency score for a
particular DMU can be constructed based on the values obtained from the Solver
Table. The graph for DMU 1 is shown in Figure 2. A picture paints 1,000 words.
By having this graph, it is more illustrative and it gives a clearer picture to managers
on the confidence level of the efficiency score for the DMU in the process of resources
allocation. Similarly, for the rest of the DMUs, the scenario analysis results could be
interpreted using the same way as illustrated.
The what-if scenario analysis which is conducted on the resources helps to
improve the usefulness of the DEA model. It makes the tool more efficient and
dynamic. It makes decision making more meaningful as it provides more useful
information to managers. With this feature, managers are not only able to evaluate the
efficiency at a single period of time, but they are also being provided with more useful
information on different scenarios. Given these, managers are able to make better
decisions and judgements.
6. Managerial implications
This section highlights the managerial implications which can be inferred from the
solutions obtained from the DEA models. Managerial implications on the efficiency of
the companys internal supply chain will be discussed by using DMU 1 as an example.
DMU 1 is the most inefficient supply chain, with a technical efficiency score of only 0.2
(from Table III). It is also the last ranked observation (ranking 22 from Table IV). Next,
managers need to identify the sources of inefficiencies for DMU 1. It was found that the
inefficiencies were due to high non utilization of its inputs. There are large excesses in
its inputs which are IMC and CT. After having identified the sources of inefficiencies,
managers need to take remedial actions. In this case, the remedial action is to reduce its
inputs level. Its IMC which currently stood at 28 days needs to be reduced to 3 days
while its CT (144 hour) needs to be cut down to 15.43 hour, in order for this supply

2.8
5.6
8.4
11.2
14
16.8
19.6
22.4
25.2
28
30.8
33.6
36.4
39.2
42

IMC (days)

0.012
1.000
0.991
0.855
0.849
0.844
0.838
0.833
0.828
0.825
0.825
0.825
0.825
0.825
0.825
0.825

0.006

1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

1.000
0.896
0.661
0.571
0.569
0.566
0.564
0.561
0.559
0.557
0.554
0.552
0.550
0.550
0.550

0.018
1.000
0.875
0.612
0.496
0.429
0.427
0.426
0.425
0.423
0.422
0.421
0.419
0.418
0.417
0.415

0.024
1.000
0.855
0.593
0.468
0.397
0.344
0.342
0.341
0.341
0.340
0.339
0.338
0.337
0.336
0.335

0.030
1.000
0.836
0.583
0.448
0.378
0.330
0.293
0.286
0.285
0.284
0.284
0.283
0.282
0.282
0.281

0.036
1.000
0.818
0.574
0.443
0.362
0.318
0.283
0.256
0.245
0.244
0.244
0.244
0.243
0.243
0.242

1.000
0.800
0.566
0.438
0.357
0.306
0.274
0.248
0.226
0.214
0.214
0.214
0.213
0.213
0.213

1.000
0.784
0.557
0.433
0.353
0.299
0.265
0.241
0.220
0.203
0.191
0.190
0.190
0.190
0.190

Cost (billion USD)

0.042
0.048
0.054
1.000
0.768
0.549
0.428
0.350
0.296
0.257
0.234
0.215
0.198
0.184
0.172
0.171
0.171
0.171

0.060
1.000
0.752
0.541
0.423
0.347
0.294
0.255
0.227
0.209
0.194
0.180
0.169
0.167
0.165
0.164

0.066

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1.000
0.737
0.534
0.418
0.344
0.292
0.253
0.224
0.204
0.189
0.176
0.167
0.164
0.162
0.161

0.072

0.084
1.000
0.709
0.519
0.409
0.337
0.287
0.250
0.221
0.199
0.181
0.169
0.163
0.158
0.157
0.156

0.078
1.000
0.723
0.526
0.413
0.341
0.289
0.252
0.223
0.200
0.185
0.173
0.165
0.161
0.160
0.158

1.000
0.696
0.512
0.404
0.334
0.285
0.248
0.220
0.198
0.179
0.166
0.160
0.156
0.154
0.153

0.090

Supply chain
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377

Table VII.
Sensitivity analysis on
efficiency level for DMU 1

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40%
35%
30%

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probability (%)

378
25%
20%
15%
10%
5%

Figure 2.
Confidence region of
efficiency score for DMU 1

0%
0

0.2

0.4
0.6
0.8
efficiency score

chain to be efficient. All these figures can be obtained from Table V. DMU 1 is also
neither cost nor allocative efficient. It only has a cost efficiency score of 0.06 and an
allocative efficiency score of 0.32 (both figures can be obtained from Table III). This
implies that, DMU 1 is not efficient in using its inputs in optimal proportions, given
the inputs costs. If no actions are taken to improve the operations of DMU 1 or reduce
the inputs costs, the current supply chain operating levels will incur a loss of
9.72 billion USD (from Table VI). Hence, this implies to managers that a cost reduction
needs to be taken. Its current cost level for the inputs are 0.06 billion USD. A cost
reduction from 0.06 billion USD to 0.01 billion USD together with the remedial actions
stated above, would be able to reduce the loss by 0.51 billion USD. This will reduce the
opportunity cost loss to only 9.21 billion. Managers can further made different
allocations on the input resources in relation to its costs by conducting a sensitivity
analysis. This sensitivity analysis table (Table VII) serves as a reference to managers
on how to optimally allocate the inputs. For instances, if the input cost is slashed down
to 0.01 billion USD, the supply chain operations will be efficient irregardless of the
input (IMC) level. In other case, if cost stood at 0.054 billion USD, the IMC has to be
reduced to at least 5.6 days in order to be efficient. Lastly, managers would have to
benchmark the operations of DMU 1 to DMU 2. In other words, DMU 1 should set DMU
2 as its target and use it as a guide to focus efforts on improving its current supply
chain performance. Table IV shows the target benchmarks for each DMU. In this case
study, it was found that only DMU 2 and 7 are economically efficient. This means that
they are efficient in terms of technical, cost and allocation. No adjustments are needed
for the economically efficient DMUs. All the other DMUs are inefficient. In a similar
way, managerial implications can be made for the other inefficient DMUs. Implications
on the target input, target output, target cost, target benchmark and opportunity cost

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can be made by referring to Tables IV-VI. Hence, with this DEA modeling approach,
managers will be able to make the best allocation of their resources, with the objectives
of minimizing cost and loss while at the same time maximizing the supply chain
efficiency.

Supply chain
performance
measurement

7. Conclusions and future research

This study is initiated by the authors because there is a lack of tools to measure supply
chain efficiency. DEA has been proven to be a reliable, flexible and efficient tool in
measuring supply chain performance. This study examines two models of efficiency
which are the technical efficiency model and cost efficiency model. The technical
efficiency model provides the measurement for technical efficiency while the cost
efficiency model provides measurement for cost and allocative efficiencies. The
information obtained from these two models helps managers to identify the inefficient
operations and take the right remedial actions for continuous improvement. In order to
demonstrate the usefulness of these two models, data were collected from various
companies. The results obtained from the analysis indicate that not all technically
efficient companies are allocative efficient. This corresponds to the theoretical concepts
of efficiencies which clearly distinguished the efficiencies between the technical
efficiency and cost efficiency models. At such, the results analysis support the validity
of the two models. Managers need to allocate their resources effectively and
efficiently so that the best of both worlds can be achieved. Cost minimization as well as
efficiency maximization can be achieved if managers have the right tools for decision
making and the correct information on hand. The opportunity cost derived from the
model proves to be very useful information for managers. This piece of information
used in combination with the scenario analysis on the input mix allocation will greatly
help managers to make better decisions in resource planning. The contribution of this
study provides useful insights into the use of DEA as a modeling tool to aid managerial
decision making in measuring supply chain efficiency. Future work of this study could
look into the possibility of modeling DEA in a stochastic supply chain environment
since supply chain operates in a dynamic environment. In addition, it will also be
interesting to look into evaluating the stochastic DEA model in multiple time period in
order to examine whether there is any technological influence on the supply chain
efficiency.

379

References
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Corresponding author
Wai Peng Wong can be contacted at: [email protected]

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