A caveat on the measurement of productive efficiency

The correspondence between used performance measures and enterprise objecti ves, such as profit maximization and cost minimization, is fundamental for manufacturing companies. This paper identifies, and critically examines, a minimal set of relevant properties that a productivity index needs to satis fy to rightly assess performance development of a decision-making unit. Com monly applied and suggested productivity measurement techniques, such as pa rtial efficiencies, total factor productivity (TFP), index number approache s, integrated partial efficiencies and operational competitiveness ratings, are analyzed in order to assess the alignment with superior objectives. Th ere is a considerable spread in the results of this class of models and the interpretation may prove difficult or misleading. As these apparently less complicated productivity measures increasingly are employed as a component in evaluation of manufacturing efficiency, the question is of high manager ial relevance. In particular, the paper points out inconsistencies with pro perties related to commensurability, monotonicity, and implications of maxi mizing behavior. Based on this viewpoint, issues such as the consistency wi th profit maximization will be shown extra interest. The paper also provide s a critique of previous work in non-parametric efficiency analysis where p roperties have been postulated or based on other arguments. The findings su ggest that there is no globally superior measurement technique to be found in this class and that care should be taken when evaluating managerial perf ormance not to penalize rational behavior. (C) 2001 Elsevier Science B.V. A ll rights reserved.