Integrating Fuzzy C-Means and TOPSIS for performance evaluation: An application and comparative analysis

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Highlights

  • FCM and TOPSIS are introduced as an integrated multiple criteria decision analysis methodology.

  • The methodology is used to analyze balanced scorecard, real data on the performance of corporations.

  • The result shows that e-commerce corporate resiliency is best predicted with non-financial data.

  • Validation of this methodology is completed by comparing to a latent cluster ranking technique.

Abstract

In this paper we introduce a multi-method multiple criteria approach for evaluating the performance of organizations. Performance analysis may include both strategic and operational performance, as well as financial and other less tangible factors. This paper introduces the use of Fuzzy C-Means and TOPSIS for organizational performance evaluation purposes. Using real company data and balanced scorecard accounting and performance dimensions the methodology is applied and evaluated. The predictive abilities of the technique from an organizational performance evaluation approach are evaluated using this data. One of the results from the illustrative application is that economic performance evaluation is not the best predictor of overall viability of some organizations, especially e-commerce based organizations.

Introduction

The field of discrete alternative multiple criteria decision analysis (MCDA) and choice have been a mainstay of modeling for a number of years. MCDA has had numerous practical applications in addition to an extensive theoretical history. Managers and decision makers within organizations and people in their everyday lives face a broad variety of decisions that require the consideration and tradeoffs associated with multiple attributes, criteria, and factors. Areas in environmental, economic, operational, strategic, marketing, engineering, design, educational, and psychological disciplines and others have come to rely on some of the latest developments in MCDA. Our research seeks to advance the understanding and development of models in MCDA to make decision making more effective, efficient, and reliable. Using clustering approaches for MCDA is one way of accomplishing this task. We seek to introduce a unique multi-stage approach to address this issue.

In this paper, we introduce the integration of Fuzzy C-Means (FCM), and Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) for discrete alternative multiple criteria ranking. We have combined the strong points of these two methodologies to construct an integrated approach to rank data objects based on multiple criteria. The combined method minimizes computational effort needed to arrive at rankings since it develops them in two stages (achieving an ‘efficiency’ target for a good MCDA model). First, the FCM algorithm is used categorize similar data objects into clusters. Then TOPSIS is utilized to develop rankings for the clusters and also separate rankings for the data objects within the clusters. To examine the validity of this tool, a comparative analysis will be completed to evaluate the integrated FCM/TOPSIS approach against a novel methodology based on Bayesian inference and a latent class clustering model (Mistry, Sarkis, & Dhavale, 2014). This research aspect will determine the effectiveness and reliability of the proposed FCM/TOPSIS technique. This latent class technique uses Markov Chain Monte Carlo simulation to extract information about the objects that is already present in the multi-characteristic data, but is not readily apparent. As part of the research we found some divergences in the solutions when comparing both approaches using real world data on electronic commerce organizations.

A secondary research goal and contribution of this paper is an evaluation of applying the proposed tool to identify characteristics of company resilience and viability. Specifically, in this paper, we apply FCM/TOPSIS and latent class model to real-world archival data to determine the viability of electronic commerce organizations. The perspectives defined in the well-known Balanced Scorecard method are used to develop the multi-criteria objectives. A unique evaluation technique called a displacement index is used in the comparative analysis and validation/reliability of the joint FCM/TOPSIS methodology. In this research we examine which dimensions of the Balanced Scorecard method would be better predictors of resilience.

This paper contributes to the literature first by introducing the integration of FCM/TOPSIS and secondly, evaluating this approach using real world information and comparing it against a benchmark provided by a robust statistical technique based on Bayesian inference. We also provide a variety of analyses that allow us to evaluate how well various factors or perspectives may perform in this environment. Additionally, potential applications and future research avenues are identified to help build upon this novel approach.

To help accomplish the goals of this paper, we begin by providing a brief background on the use of clustering approaches for MCDA, along with background on FCM/TOPSIS techniques. Then data for an illustrative application of the approach is presented. The section following contains comparative analysis and discussion. The paper concludes with a summary of findings, limitations and direction for future research.

Section snippets

Background

Many approaches exist for MCDA (e.g. see Guitouni & Martel, 1998) and can be categorized on a variety of dimensions including explicit versus implicit alternative valuation, compensatory versus non-compensatory, discrete versus continuous alternative, interactive versus non-interactive, objective versus subjective weighting (Bai and Sarkis, 2012, Wang et al., 2009, Yoon and Hwang, 1995). Applications of MCDA approaches have been completed as stand-alone tools, but many times multi-stage

Illustrative application

We now provide an illustrative application of the Fuzzy C-Means and TOPSIS methodologies to rank performance of actual companies based on multiple criteria. Later in the paper we compare this approach to another approach, a latent class model within a Bayesian framework, to rank the companies using the same set of criteria. The latent class model is selected due to its similarity of utilizing a clustering approach for ranking purposes. We compare the ranking under these two methodologies under

Prediction of future firm performance using FCM/TOPSIS

In this section, we attempt to answer the question of how the FCM/TOPSIS technique can be used to evaluate various performance measure perspectives capabilities to foretell organizational resilience.

Table 8 documents the subsequent history of each company in the two-year period following 1999. Each company’s history was tracked by obtaining relevant announcements and financial information from publicly available databases. As shown in Table 8, eight out of the eleven companies in the

Summary and research contribution

In this paper, we introduce a FCM/TOPSIS approach for ranking objects based on simultaneous consideration of multiple criteria and compare against a new methodology, latent class clustering. Both techniques utilize cluster-based ranking systems and thus a more direct comparison could be made by this methodological similarity. This research helps to expand the scope of utilizing cluster based ranking approaches for multiple criteria decision analysis (MCDA). The specific application focus of

Acknowledgments

This work was partially supported by the National Natural Science Foundation of China Project (71102090); Liaoning Education Department Foundation of China (W2011125).

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