Efficiency decomposition in network data envelopment analysis with slacks-based measures

• We develop a slacks-based efficiency measure for network systems.
• The network measure is more discriminative than the conventional black-box measure.
• The system efficiency is a weighted average of the process efficiencies.
• We calculate the system and process efficiencies for ten electricity companies.

Conventional data envelopment analysis (DEA) treats the production system as a black box when measuring efficiency, ignoring its internal structure. By taking the operations of the component processes of the system into consideration, several network DEA models have been developed. Of these, the slacks-based measure (SBM) approach has attracted much attention for its ability to provide suitable efficiency measures, especially for weakly efficient production units. This paper proposes a general SBM model for network systems, and is able to decompose the system efficiency into a weighted average of the process efficiencies. This relationship holds for all types of network structure. An example shows that the network model has stronger discriminating power than the conventional black-box model, and the system efficiency is indeed a weighted average of the process efficiencies. The decomposition of the system efficiency helps identify key factors to improve the performance of a production unit.