Research on Supply Chain performance Evaluation Based on DEA/AHP model

GUO Jing-yuan1, LIU Jia 2QIU Li3 School of Management, Harbin Institute of Technology E-mail: nmbtlj@yahoo.com.cn Abstract
According to the principle of Balanced Score Card method (BSC), this paper constructs the evaluating index system of the supply chain on four aspects, financial value, business process, client service and study- innovation. On the basis of illustrating the DEA and the AHP methods, this paper combines them in progress and constructs the DEA/AHP model for evaluating the supply chain performance. The principle of DEA/AHP model is to use DEA method to calculate the relative efficiency rate of the decision-making units (DMU), with which construct the judging matrices of AHP, and then get the characteristic vector of judging matrices and rank the DMUs at last. This model overcomes the limitations that DEA cant rank all the DMUs and AHP is highly subjective, so it can evaluate the supply chain performance more scientific and more reasonable. methods and models are only a few, including SCOR model [3], Analytic Hierarchy Process (AHP) [4], Balanced Score Card (BSC) [2] and Data Envelopment Analysis (DEA) [5]. Nevertheless, most of these methods need people themselves to evaluate the relative importance of indexes in the evaluation process. With the unavoidable highly subjectivity, they can not completely reflect the true operating conditions. DEA method is a kind of non-parameter objective evaluating method, which is an ideal method for evaluating the performance of supply chain [6]. However, the evaluating results of DEA model can only divide the units into efficient and inefficient classes, which can not satisfy the practical need to rank all the units under one standard. This paper uses the DEA/AHP model to overcome the limits of the DEA method and the AHP method respectively, so it is more scientific and reasonable.

1. Introduction
As a new management idea and model, the supply chain management has become a crucial strategic factor for the enterprise to improve its benefits and competitive ability. According to the evaluation on the operation of supply chain, problems existing in its process can be found immediately, the objective basis of the supply chain management can be provided and the total supply chain costs can be reduced. In this way, it makes the supply chain development healthy. So far, the studies on supply chain performance evaluation are mainly on the construction of the evaluating index system. Lummus set up four-aspect indexes [1]. Ma Shi-hua put forward some general statistic indexes [2]. PRTM, the organization which is authoritative on supply chain research, put forward 11 indexes in SCOR (supply chain operations reference) model [3]. However, the studies on the evaluation

2. Evaluating index system

The Balanced Score Card (BSC) is an enterprise performance management system, which was put forward by Professor Robert. S. Kaplan and David. P. Norton of the Harvard Business School in 1992[2]. The BSC method, proceeding from the enterprises strategy and fully considering the requests from different angles of the enterprises operation, reflects the balance among a series of indexes. According to BSC method, this paper constructs the evaluating index system from four points of views, financial value, business process, client service and study to innovation. These four index basically reflect the current operating condition and future prospect of supply chain.

2.1. Financial value indexes

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Financial value indexes include total supply chain cost, the capital income rate of supply chain, the total net profit value of supply chain and the turnover rate of cash.

3.2. Evaluation of Analytic Hierarchy Process

Analytic Hierarchy Process (AHP) is a practical decision-making method, which was put forwarded by American operation researcher A.L.Saaty in the middle of the 1970s. AHP is an effective method for solving multi-target and multi-layer decision-making problem. Its advantages are that it can make the qualitative index into quantitative index and it is relative stable because decision maker sets its judge matrices subjectively. But its disadvantage is also obvious that the experts propose the judging matrices according to their experiences and different experts have different judgments, so it is subjective in some way. Besides, since AHP requires calculating so many pairs of optional plans, inaccurate judge may occur.

2.2. Business process indexes

Business process indexes comprise the product demand rate, the product sale rate, the production flexibility and the order advance.

2.3. Customer service indexes

Customer service indexes include the customers satisfaction rate, the complete execution rate of orders and the guarantee cost or the returned merchandise cost.

2.4. Innovation and study indexes

Innovation and study indexes comprise the intelligence capital rate, the new product income rate and the rate of increasing investment in research and development.

3.3. DEA/AHP evaluating model

The principle of DEA/AHP method is using the evaluating result of DEA to construct the judging matrices of AHP and then using the AHP method to rank the DMUs. It can overcome the ranking constraints of DEA and the subjective flaw of AHP at the same time. DEA/AHP evaluating process has two steps [8]. Step1. Using the DEA method, get the relative efficiency of each pair of DMUs. Assuming there are n decision units and each unit has m inputs and s outputs, Xij means the i-th input of the j-th DMU, Yij means the r-th output of the j-th DMU. The DEA method is used to calculate the effective value of DMUA and DMUB (without considering other DMUs). EAA and EAB are the relative efficiency of DMUA and DMUB.

3. DEA/AHP evaluating models

3.1. Evaluation of Data Envelopment Analysis
Data Envelopment Analysis (DEA) was created by American operational researcher A. Charnes and W.W.Cooper in 1978. DEA uses mathematics programming models to evaluate the relative efficiency among many Decision Making Units (DMU) which have a lot of inputs and outputs. Actually, it judges the efficiency of DMU according to whether the DMU-observating data is laying on the production frontier of the possible production sets [7]. DEA is an ideal method for evaluating the performance of supply chain. Firstly, supply chain is a complex dynamic system of multi-target, while the evaluating object of DEA evaluation is decision making unit of multi-input and multi-output, according to which DEA adjusts the weight of model indexes dynamically. Secondly, evaluating indexes, which are from different aspects, have different dimensions, while DEA method can deal with all the input and output without transforming the dimensions and the units. However, the result of using the DEA method can only divide the DMU into two classes, efficient and inefficient, it cant rank the DMUs and the partial superiority of DEA are not improved either.

E AA = max u r y rA
u r ,v i r =1

(1)

m v i x iA = 1 i =1 s u r y rA 1 r =1 m s .t . s u r y rB v i x iB 0 i =1 r =1 u r 0 , r = 1, , s v 0 , i = 1, , m i

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E BA = max
u r , vi
m

u r y rB
r =1

v i x iB = 1 i =1 s u r y rB 1 r =1 m s .t . s 1 u r y rA E AA 1 v i x iA = 0 = i= r u r 0 , r = 1, , s vi 0 , i = 1, , m
EBB and EAB can be calculated by the same method. Then the relative efficiency ratio of DMUA and DMUB,

evaluating index above and the DEA model, considering the length and space of the paper, evaluating input indexes are confirmed as production flexibility (day)X1, order advance(day) X2, and guaranteeing cost or the returned merchandise cost (ten thousands Yuan) X3; the output index is considered as complete execution rate of orders (%)Y1, satisfaction rate of customer(%)Y2, and intelligence capital rate (%) Y3. DMUj(j=1, 2, , 8)means each retail enterprise in Chengdu city. Data are shown in Tab.1. Tab.1 Input and Output Data Table
DMU1 DMU2 DMU3 DMU4 DMU5 DMU6 DMU7 DMU8 X1 15 70 45 40 35 60 55 30 X2 15 25 16 30 25 18 20 12 X3 0.05 0.10 0.07 0.12 0.11 0.15 0.08 0.09 Y1 0.80 0.90 0.96 0.85 0.75 0.85 0.70 0.95 Y2 0.80 0.90 0.885 0.75 0.845 0.755 0.85 0.70 Y3 0.42 0.53 0.47 0.32 0.44 0.25 0.51 0.46

a AB =

(3) Generally, theres j row k column element ajk in the AHP judging matrices:

E AA + E AB E BB + E BA

a jk =

E jj + E jk E kk + E kj
(4)

4.2. Calculating DEA efficiency value of each DMU

Using the software Lingo, calculate the efficiency value of each DMU according to the principle of DEA method. The result is shown in the Tab.2. Tab.2 DEA ranking result
DMU DEA value DEA ranking DMU DEA value DEA ranking DMU1 1 1 DMU5 0.6188 7 DMU2 0.7149 6 DMU6 0.7190 5 DMU3 1 1 DMU7 0.8599 4 DMU4 0.4929 8 DMU8 1 1

1 And a jj = 1 , a kj = a jk
Step2. Using the relative efficiency ratio got from step1, construct judging matrices, and get the ranking vector. Calculate the biggest characteristic root max and characteristic vector

which is got from last judging matrices step, the number j vector is Wj and it reflects the relative importance level of the number j DMU. This relative importance level is the ranking value of the DMUs. Because the elements of the judging matrices come from the objective evaluating result of DEA, so it is unnecessary to have the consistency test.

A = [a jk ]nn

= (w1 , w2 ,

wn )

of the

It is proved that DEA model only divides DMUs into two, the efficient (DMU1 DMU3 DMU8) and the inefficient. But using the DEA/AHP model can rank all the DMUs.

4. Example
4.1. Constructing the input and output index
There are statistic data of the supply chain of eight retail enterprises in Chengdu city. According to the

4.3. DEA/AHP model calculation

Calculate the relative efficiency value of each pair of DMUs according to the equity (1) and (2) and substitute the value into equity (4). Then the matrices showed in Tab.3 are got.

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Tab.3 Judging matrices DMU1 DMU1 DMU2 DMU3 DMU4 DMU5 DMU6 DMU7 DMU8 DMU1 DMU2 DMU3 DMU4 DMU5 DMU6 DMU7 DMU8 1.0000 0.7571 1.0000 0.5313 0.6338 0.8854 0.9107 1.0000 DMU5 1.5778 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 DMU2 1.3208 1.0000 1.2668 1.0000 1.0000 1.0000 1.0000 1.0000 DMU6 1.1294 1.0000 1.2706 1.0000 1.0000 1.0000 1.0000 1.3908 DMU3 1.0000 0.7894 1.0000 0.9961 1.0000 0.7870 0.9495 1.0000 DMU7 1.0981 1.0000 1.0532 1.0000 1.0000 1.0000 1.0000 1.0000 DMU4 1.8822 1.0000 1.0039 1.0000 1.0000 1.0000 1.0000 1.2444 DMU8 1.0000 1.0000 1.0000 0.8036 1.0000 0.7190 1.0000 1.0000

5. Conclusion
DEA model has advantages of adjusting the weight of the model dynamically according to the input and output and dealing with the input and output indexes of different dimensions. Therefore, it is suitable to use DEA model to evaluate the performance of supply chain. Using the DEA/AHP model for evaluating the supply chain performance is making full use of the advantages above of DEA model, while merging AHP into the frame of DEA and using AHP to rank all the DMUs so that it can overcome that DMUs can not be wholly ranked. Besides, using DEA/AHP model to evaluate the supply chain performance only requests the objective data that can reflect the operating condition of supply chain and its nodes. So, DEA/AHP model is not only more feasible than subjective evaluating methods, but also simplifies the calculation by omitting the consistency test.

References
[1]Lummus R.R, Vokurka R.J and Alber K.L, Strategic supply chain planning[J], Production and Inventory Management Journal, 1998.(3), pp. 49-58. [2]Ma Shi-hua,, Supply chain management [M], China Machine Press, 2000 [3] PRTM. Scor model [EB/OL]. http://www. supply-chain. org/html/scor/overview, cfn, may.2000 [4]F.T.S. Chan, Performance Measurement in a Supply Chain,The International Journal of Advanced Manufacturing Technology, Springer London, Volume 21, Number 7, Date: May 2003, pp.534 548 [5] YANG Mao-sheng, LI Tao, BAI Shu, Performance evaluation of supply chain based on DEA method, Journal of Xian University of Engineering Science and Technology, Vol.19, No.2, Jun,2005, pp.180-182 [6] Wang Ying , Sun Lin-yan, Chen Hong, Logistics synthesis evaluating on DEA/AHP two- stage model, Journal of Changan University (Natural Science Edition), Vol.23, No.3, May. 2003, pp.80-84 [7]Wei Quan-ling, Data Envelopment Analysis, Science Press, 2004, pp.1 [8]Sinuany-Stern Z, Mehrez A, Hadad Y. An AHP/DEA methodology for ranking decision making units [J].International Transaction in Operational Research,2000, 7(2), pp.109124

Calculate the biggest characteristics root

max and

1 2 n . characteristic vector The following is the result. max = 8.048 = [ 0.152, 0.117, 0.134, 0.112, 0.118, 0.114, 0.122, 0.133 ]T According to the principle of DEA/AHP, it is unnecessary to have the consistency test. The ranking result of supply chain performance of eight retail enterprises is shown in Tab.4.

= (w , w ,

)T

Tab.4 DEA/AHP ranking result

DMU DEA/AHP value DEA/AHP ranking DMU DEA/AHP value DEA/AHP ranking DMU1 0.152 1 DMU5 0.118 5 DMU2 0.117 6 DMU6 0.114 7 DMU3 0.134 2 DMU7 0.122 4 DMU4 0.112 8 DMU8 0.133 3

Comparing the two kinds of ranking results, it can be seen that the efficient DMUs differentiated by DEA are superior to the inefficient DMUs in DEA/AHP ranking process and the result of calculating with the DEA/AHP model is to subdivide the efficient DMUs got from DEA.

Proceedings of the 2006 IEEE Asia-Pacific Conference on Services Computing (APSCC'06) 0-7695-2751-5/06 $20.00 2006