CHAPTER 3

CONCEPT OF DATA ENVELOPMENT ANALYSIS:

METHODS AND MATERIALS

Data envelopment analysis (DEA) is a linear programming based technique

for measuring the relative performance of organizational units where the
presence of multiple inputs and outputs makes comparisons difficult. This
chapter reviews the literature on DEA mathematical models and their
extensions that are germane to this research and the applications of this
approach to various sectors including mining sector. This chapter provides the
discussion on various DEA models available and their methodologies and
applications. The DEA models [111 include Constant Return to Scale (CCR)

model, The Variable Return to Scale (VSR) model, Stochastic Data

Envelopment Analysis (SDEA) and Non parametric Stochastic Frontier
Estimation.

DEA is a multi-factor productivity analysis model for measuring the

relative efficiency of a homogenous set of coal mines (DMU’s). For every
inefficient coal mine, DEA identifies a set of corresponding efficient coal
mines that can be utilized as benchmarks for improvement of performance and
productivity. DEA developed based on two scale of assumptions viz.,
Constant Return to Scale (CRS) model (17] and Variable Return to Scale

(VRS) model.

3.1 Introduction
There is an increasing concern with measuring and comparing the
efficiency of organizational units such as local authority departments, schools,
hospitals, shops, bank branches and similar instances where there is a
relatively homogeneous set of units.

52
The usual measure of efficiency, i.e.:

__ . output
ethciency =---------
input

is often inadequate due to the existence of multiple inputs and outputs related
to different resources, activities and environmental factors.

A formula for relative efficiency incorporating multiple inputs

and outputs is introduced now, and the DEA model which allows relative
efficiency measures to be determined is developed. This is followed by a
discussion of the information made available by solving the model and some
issues of practical concern in applying the technique.

3.2 Efficiency Measurement Concepts

Relative Efficiency Measurement:

The measurement of relative efficiency where there are multiple possibly

incommensurate inputs and outputs was addressed by Farrell and developed
by Farrell and Fieldhouse focusing on the construction of a hypothetical
efficient unit, as a weighted average of efficient units, to act as a comparator
for an inefficient unit.

A common measure for relative efficiency [23] is,

Weighted sum of outputs

Efficiency =— ■; :----------- —-----------
Weight sum of inputs

The primary purpose of this section is to outline a number of commonly used

efficiency measures and to discuss how they may be calculated relative to an
efficient technology, which is generally represented by some form of frontier

53
function. Frontiers have been estimated using many different methods over the
past 40 years. The two principal methods are:
1. Data envelopment analysis (DEA) and
2. Stochastic frontiers,
Which involve mathematical programming and econometric methods,
respectively?

3.3 Data Envelopment Analysis (DEA) Models

Data envelopment analysis (DEA) is the non-parametric mathematical
programming approach to frontier estimation. The discussion of DEA models
presented here is brief, with relatively little technical detail. More detailed
reviews of the methodology are presented by Seiford and Thrall (1990), Lovell
(1993), Ali and Seiford (1993), Lovell (1994), Chames et al (1995) and
Seiford (1996).The piecewise-linear convex hull approach to frontier
estimation, proposed by Farrell 1957), was considered by only a handful of
authors in the two decades following Farrell’s paper.Authors such as Boles
(1966) and Afriat (1972) suggested mathematical programming methods
which could achieve the task, but the method did not receive wide attention
until a the paper by Chames, Cooper and Rhodes (1978) which coined the
term data envelopment analysis (DEA). There have since been a large number
of papers which have extended and applied the DEA methodology. Chames,
Cooper and Rhodes (1978) proposed a model which had an input orientation
and assumed constant returns to scale (CRS).6 Subsequent papers have
considered alternative sets of assumptions, such as Banker, Chames and
Cooper (1984) who proposed a variable returns to scale (VRS) model [23].

The following discussion of DEA begins with a description of the input-

orientated CRS model was the first to be widely applied.

3.4 The Constant Returns to Scale Model (CRS)

A number of different versions of the basic DEA model have been developed
to address a series of potential shortcomings of the original DEA model.

54
We will examine three variations of the DEA methodology and study the
differences in assumptions of the three as well as compare the different
outcomes of each. The purpose of this analysis is to understand whether the
choice of methodology may have an impact on the outcome of an analysis.

3.4.1 CRS Input- oriented Model

In all variations of the DEA models, [17] the DMU(s) with the best

inherent efficiency in converting inputs Xi, X2,...,x„ into outputs Yi, Y2,...,Ym is
identified, and then all other DMUs are ranked relative to that most efficient
DMU. For DMU 0, the basic CRS Input Oriented model (so-called CCR after
Chames, Cooper, and Rhodes) is calculated as follows:

max /?o = r

2>-iv
----- ---------- <1
subject to y r,Xij for each unit j 3.1

Mr,V, >0

The interpretation of ur and w is that they are weights [101 applied

to outputs yn and inputs xij and the are chosen to maximize the efficiency score
h0 for DMUo. The constraint forces the efficiency score to be no greater than 1
for any DMU. An efficiency frontier is calculated, enveloping all data points
in a convex hull. The DMU(s) located on the frontier represent an efficiency
level of 1.0, and those located inside the frontier are operating at a less than
full efficiency level, i.e. less than 1.0. The above fractional program is
executed once for each participating DMU, resulting in the optimal weights

55
being determined for each DMU. Before solving the problem, the denominator
in the objective function is removed and instead an additional constraint is
added. Also, the original constraint is manipulated in order to convert the
fractional program to a linear program. These two steps result in the
following:

max *o= X"r.’V,

2X>v -X’v'v -°
r i
3.2

subject to =1
i

II,-V, >0

In simpler notation, this is written as:

max(v.u) = liy0

-\'X + nY< 0 ------------------- 3.3

subject to itv0 =1

v > 0,// > 0

Finally, before solving, the linear program is converted to its dual for
computational efficiency reasons:

56
 mm( 6./.) = 0

0kq - XX > 0 ------------------ 3.4

subject to IA > V0

A >0
With the addition of slack variables, the dual problem becomes:
min( $./,) = 0

0\‘o - XX = s ” ------------ 3.5

subject to YX = V0 + S ’’’

A > 0. s+ > 0..s~ >0

The slack variables can be interpreted as the output shortfall and the input
overconsumption compared to the efficient frontier. The following is linear
program in which the slacks are taken to their maximal values.

m s
max][>~
i-I
+ r=l
2>r
subject to
z -VjT + s~ = / = 1.2,...,///; --------- 3.6
FI
ii

21 ) rf^-j ~~ ~ y ro

Ars;,s; >o ytj, r

Where we note the choices of si and -do not affect the optimal which

is determined from model (3.5 ).

3.4.2 CRS Output-oriented Model

Alternately, one could have started with the output side and considered
instead the ratio of virtual input to output. This would reorient the objective
from max to min, as in (3.1), to obtain:

57
 Mill /Zrttr.V™
Subject to
ZiY,xv / I> 1 for; = 1- .... - 3.7
ur. r, > s > 0 for all / and r.
Again, the Chames-Cooper (1962) transformation for linear fractional
programming yields model (1.8) (multiplier model) below, with associated
dual problem, (1.9) (envelopment model), as in the following pair,

mine/ = 2>vt10
i—l
subject to
m s
Zn*tf >o 3.8
7=1 r=l

r=l
> £. Vr,7

m i
max # + £(X s7 + Z K)
1 1=1 7=

subject to
s
zv,+*;=.- 7 = 1.2... ..nr.
M
n
4

r = 1*2*.
1!
I
XM
*5.

v,

*7
IV

;=ix
0

Here we are using a model with an output oriented objective as contrasted

with the input orientation in (3.6). However, as before, model (3.9) is
calculated in a two-stage process. First, we calculate First, we calculate <p* by
ignoring the slacks. Then we optimize the slacks by fixing 9* in the
following linear programming problem,

58
 max^s.
r=l +ZK
r=l
subject to
Zx^J+s:=xi /= 1.2..... - 3.10
j-i
2-3 tj^’j <P .v, 7* = 1.2..... s:
J-l

Aj > 0 j = 1.2,..., 77.

Table 3.1 presents the CRS model in input- and output-oriented versions, each
in the form of a pair of dual linear programs.

Table 3.1 CRS DEA Model

Input-oriented
Envelopment model Multiplier model
m s
+ ZK) maxz = ZMrXro
subject to
M /-=! subject to
s
2>,.v„ - m £0
Z.x *,+s; i = 1.2,..., w;
j-l r-1 ’ M
n m
Z.Vn^j ~K = yn r = 1,2,....s; TVX ~l
M l
kj'z 0 j ~ 1,2.... n. ftr.v, > t: > 0
Output-oriented
Envelopment model Multiplier model

max m
+£■(!>•; +sv.s;) ming = m
/-l r-1 7-1
subject to subject to
ixvA.+sJ =xi0 i -1.2....w; m s
Zv,x9 - ZVr>\: * 0
j-i 1 M r-l
Zy^Aj -5* = r = 1,2..... s; Z/yyro = 1
7»t r»l
/lr>V, >£>0
Xj>0 j = 1,2,...,».

3.5 VRS (Variable to Returns Scale) or BCC Model

If the constraint is £f=i 7.j = 1 is adjoined, they are known
as BCC (Banker, Cooper, 1984) models. This added constraint introduces an
additional variable, fi0 into the (dual) multiplier problems. As will be seen in

59
the next chapter, this extra variable makes it possible to effect retums-to-scale
evaluations (increasing, constant and decreasing). So the BCC model is also
referred to as the VRS (Variable Returns to scale) model and distinguished
form the CCR model which is referred to as the CRS (Constant Returns to
Scale) model.
The CRS model is designed with the assumption of constant
returns to scale. This means that there is no assumption that any positive or
negative economies of scale exist. It is assumed is that a small unit should be
able to operate as efficiently as a large one - that is, constant returns to scale.
In order to address this, Banker, Chames, and Cooper developed the BCC
model. It is also referred as VRS model. The VRS model is closely related to
the standard CRS model as is evident in the dual of the BCC model:
min(6U)= 6

- XA = s
YA = vQ + s* 3.11
subject to
eA = l
A>0.s+ >0..$~ >0

The difference compared to the CRS model is the introduction of the

convexity condition = 1 . This additional constraint gives the frontiers
piecewise linear and concave characteristics.

3.6 Increasing Returns Scale (IRS) and Decreasing Returns

Scale (DRS) Models
Returns to scale refers to a technical property of production that examines
changes in output subsequent to a proportional change in all inputs (where all
inputs increase by a constant). The output increases by that same proportional

60
change with input then there are constant returns to scale (CRTS), sometimes
referred to simply as returns to scale. If output increases by less than that
proportional change, there are decreasing returns to scale (DRS). If output
increases by more than that proportion, there are increasing returns to scale
(IRS).
Example: Where all inputs increase by a factor of 2, new values for output
should be: Twice the previous output given a constant return to scale (CRTS)
less than twice the previous output given a decreased return to scale (DRS)
more than twice previous output given an increased return to scale (IRS).

3.7 Cross Efficiency (CE) Model

Cross efficiency in DEA allows for effective discrimination between niche

performers and good overall performers. Cross efficiency [48] score of a DMU

represents how well the unit is performing with respect to the optimal weights

of another DMU. A DMU that achieves high cross efficiency scores is

considered to be a good overall perform to improve the discrimination power

of DEA, Sexton et al (1986) first introduces the concept of a cross-efficiency

measure [62l in DEA. The basic idea is to use DEA in a peer-appraisal instead

of a self-appraisal, which is calculated by the CRS (constant returns to scale)

model. Peer evaluation is done by constituting a cross efficiency matrix of

efficiency value given to each DMUs. This technique can also identify

‘overall’ efficient and ‘false positive’ DMUs, and it selects appropriate targets

for poorly performing DMUs to learn as a benchmark.

61
 Cross Efficiency Models: Aggressive and Benevolent Approaches

Aggressive Model

, f 1
min Z V v*Z^a k=\ i*p
m ( \
sJ Z=1 v
j
uj'Lxji
i*p /
=1
s m

4=1 y=i

ZV*JV -0PlLujxjP =0
4=1 y=l

V* ,Uj> 0 V*, j

Where 0p\$ the relative efficiency score of DMU p obtained from the CCR model

Benevolent Model

max £ v*Z yu
4=1 V >*P

m f )
S-f Z
y=i y
ujTxj>
i*p J
=1
s m
Zv*->^“Z“yx;> *°» Vi*P
k=\ j=1

s m

Z v^kp -°
4=1
p1Lujx,p
j=1
=0
vk,Uj> 0 Vk,j

Where 6^ is the relative efficiency score of DMU p obtained from the CCR model

62
 3.8 Scale Efficiency (SE) Model
In DEA, Scale Efficiency [15] is routinely calculated. This measure

may, however, tell us very little about whether a production unit is over- or
undersized. An empirical case is used to illustrate that, under some
circumstances, scale inefficiency may simply reflect that a production unit
is producing too little, given its use of factors of production, and not that is
over- or undersized. A fictitious sample based on a production function
with variable returns to scale is used for demonstrating that in small
samples with large deviations from the efficiency frontier and limited
variability between units in terms of factor proportions scale efficiency may
not reflect very well how far the production units are from being of an
optimal size.

3.9 Super Efficiency (SE) Model

Data Envelopment Analysis (DEA) evaluates the relative efficiency of
decision-making units (DMUs) but does not allow for a ranking of the
efficient units themselves. A modified version of DEA based upon comparison
of efficient DMUs relative to a reference technology spanned by all other units
is developed (called super-efficiency model). The procedure provides a
framework for ranking efficient units and facilitates comparison with rankings
based on parametric methods.
Super efficiency model allows for effective ranking of efficient DMUs

max
m

st 2>a=1
m

vk,Uj>0 Vk,j

63
Super-efficiency data envelopment analysis (DEA) model is obtained when a
decision making unit (DMU) under evaluation is excluded from the reference
set. Because of the possible infeasibility of super-efficiency DEA model, the
use of super-efficiency DEA model has been restricted to the situations where
constant returns to scale (CRS) are assumed. It is shown that one of the input-
oriented and output-oriented super-efficiency DEA models must be feasible
for a any efficient DMU under evaluation if the variable returns to scale
(VRS) frontier consists of increasing, constant, and decreasing returns to scale
DMUs. We use both input- and output-oriented super-efficiency models to
fully characterize the super-efficiency. When super-efficiency is used as an
efficiency stability measure, infeasibility means the highest super-efficiency
(stability). If super-efficiency is interpreted as input saving or output surplus
achieved by a specific efficient DMU, infeasibility does not necessary mean
the highest super-efficiency.

3.10 Slacks-Based Measure of Efficiency (SBM) Model

Finally, the second adjustment to the basic CRS model is the Slacks-
Based Measure of efficiency (SBM), proposed by Tone. The motivation for
the development of this model is the observation that while both the CRS and
the BCC models calculate efficiency scores, neither is able to take into
accounts the resulting amount of slack for inputs and outputs. Consequently,
the purpose of this model is to minimize the input and output slacks, resulting
in this fractional program, which is converted to a linear program before
solving:

min(/!.s~ j) p =

x0 —XA = .s"
subject to YA = V0 + s~ 3.12

64
3.11 Window Analysis
In the examples of the previous sections, each DMU was observed only
once, i.e., each example was a cross-sectional analysis of data. In actual
studies, observations for DMUs are frequently available over multiple time
periods (time series data), and it is often important to perform an analysis
where interest focuses on changes in efficiency over time. In such a setting, it
is possible to perform DEA over time by using a moving average analogue,
where a DMU in each different period is treated as if it were a "different"
DMU. Specifically, a DMU's performance in a particular period is contrasted
with its performance in other periods in addition to the performance of the
other DMUs.
The window analysis technique represents one area for further research
extending DEA. For example, the problem of choosing the width for a window
(and the sensitivity of DEA solutions to window width) is currently
determined by trial and error. Similarly, the theoretical implications of
representing each DMU as if it were a different DMU for each period in the
window remain to be worked out in full detail.

3.12 Allocative and Overall Efficiency

To this point we have confined attention to “technical efficiency” [31] which,

does not require a use of prices or other “weights.” Now we extend the
analysis to situations in which unit prices and unit costs are available. This
allows us to introduce the concepts of “allocative” and “overall” efficiency
and relate them to “technical efficiency” in a manner first introduced by M.J.
Farrell (1957).
For this introduction we utilize Figure 3.1 in which the solid line segments
connecting points ABCD constitute an “isoquant” or “level line’ that
represents the different amounts of two inputs (xt, xz) which can be used to
produce the same amount (usually one unit) of a given output. This line
represents the “efficiency frontier” of the “production possibility set” because

65
it is not possible to reduce the value of one of the inputs without increasing the
other input if one is to stay on this isoquant. The dashed line represents an
isocost (=budget) line for which (xi, X2) pairs on this line yield the same total
cost, when the unit costs are cl and c2, respectively. When positioned on C
the total cost is k. However, shifting this budget line upward in parallel
fashion until it reaches a point of intersection with R would increase the cost
to k > k fact, as this Figure shows, k is the minimum total cost needed to
produce the specified output since any parallel shift downward below C would
yield a line that fails to intersect the production possibility set. Thus, the
intersection at C gives an input pair (xi, X2) that minimizes the total cost of
producing the specified output amount and the point C is therefore said to be
“allocatively” as well as “technically” efficient.
Now let R represent an observation that produced this same output
amount. The ratio 0 < OQ / OR < 1 is said to provide a “radial” measure of
technical efficiency with 0 < 1 - (OQ / OR) < 1 yielding a measure of
technical inefficiency. Now consider the point P which is at the intersection of
this cost line through C with the ray from the origin to R. We can also obtain a
radial measure of “overall efficiency” from the ratio 0 < OP / OR < 1 In
addition, we can form the ratio 0 < OP / OR < 1 to obtain a measure of what
Farrell (1957) referred to as “price efficiency” but is now more commonly
called “allocative efficiency.” Finally, we can relate these three measures to
each other by noticing that

OP OO OP

Which we can verbalize by saying that the product of allocative and technical
efficiency equals to overall efficiency in these radial measures.

66
 C4

To implement these ideas we use the following model, as taken from Cooper,
Seiford and Tone (2000, p. 236),

min Sc x.
" to i
i*1
subject to
n
Vr X < Y i =1 .m 3.14
j=l

r = l.. s
L < ZJL, < V
j=l

where the objective is to choose the X; and Xj values to minimize the total cost

of satisfying the output constraints. The Cj0 in the objective represent unit
costs. This formulation differs from standard models, as in Fare, Grosskopf
and Lovell (1985, 1994), in that these unit costs are allowed to vary from one
DMUco to another in (3.14). Finally, using the standard approach, we can
obtain a measure of relative cost (= overall efficiency) by utilizing the ratio:

67
 m M
TC. X
i=l f
0 1 3.15
m
T c. x.
*—* W 10

M
Where the** are the optimal values obtained from (3.14) and the Xj0 are the
observed values for DMUo.

3.13 Profit Efficiency

We now introduce another type of model called the “additive model” to
evaluate technical inefficiency. First introduced in Chames et al. (1985) this
model has the form

max tsr"+t.s*'
r~l i*l
subject to
v = fr./L-r. r = 1.2....s
■ ro *->• t} J r
j=l 3.16

.-U
j-i

o <Ars+ $~:'xfLj.r.
This model uses a metric that differs from the one used in the “radial measure”
model.3 It also dispenses with the need for distinguishing between an “output”
and an “input” orientation as was done in the discussion with above mentioned
models. Because the objective in (3.16) simultaneously maximizes outputs and
minimizes inputs-in the sense of vector optimizations. This can be seen by
utilizing the solution to (3.16) to introduce new variables yro, xlo defined as
follows,

V
. ro
= V
• ro
4- S'
r
> V
— . ro r = 1.... s\ 3.17
\
io
— X
io
— S~
i
< Xio' f = 1.2....,/;/.

Now note that the slacks are all independent of each other. Hence an optimum
is not reached until it is not possible to increase an output%0 or reduce an

68
Input xi0 without decreasing some other output or increasing some other
input.

3.14 Stochastic Data Envelopment Analysis (SDEA)

Stochastic Data Envelopment Analysis (SDEA) is an extension of Data
Envelopment Analysis (DEA) technique. This SDEA model allows for the
possibility of random errors in model specification or measurement via a
symmetric random error component, in addition to the one sided deviation
attributable to inefficiency in the use of input resources.

3.15 Additive Model

In basic models of DEA, we distinguish between input-oriented and output-
oriented models. In this model, we combine both orientations in a single
model, called Additive model.

max z =es~+es*
s£
x0 = X A + s~
y0 =7 l~s +
eA = l
A>0, s',s*> 0

3.16 Weight Restrictions in DEA

The DEA problem allows for unrestricted weight flexibility [63] in

determining the efficiency scores of DMUs. This allows units to achieve rela­
tively high efficiency scores by indulging in inappropriate input and output
factor weights. Weight restrictions allow for the integration of managerial
preferences in terms of relative importance levels of various inputs and
outputs. For example, if output 1 is at least twice as important as output 2 then
this can be incorporated into the DEA model by using the linear constraint vl
> 2v2. Methods for incorporating weight restrictions have been suggested by
several researchers. Included in this stream of research are works by Chames

69
et al. (1990), Dyson and Thannassoulis (1988), Thompson et al. (1986, 1990,
1995), and Wong and Beasley (1990). Although weight restrictions effectively
discriminate between efficient and inefficient units, ranking DMUs can still be
an issue. In order to allow for a ranking of units in the presence of weight
restrictions, a combination of models proposed by Talluri and Yoon (2000)

3.17 Extensions to DEA models

These are the four models commonly available in literature and described

a profound basis for an efficiency analysis with different returns to scale,

different envelopment surfaces and different ways to project inefficient units

to the efficient frontier [Chames A. et al. (1994)]. During the last ten (10)

years a lot of extensions to these four models have been developed that allow

further fine tuning to the basic models. Most of these extensions of DEA {67j

have been a result of the application of the technique to real life problems

(Allen et. al. (1997)). In this section, some of these numerous methodological

extensions are briefly presented that could be utilized to improve its

discriminatory power in performance evaluation.

a) The basic DEA models always assume that inputs and outputs can be

altered by the DMUs. In realistic situation there are often exogenous

variables that cannot be altered. For example the distribution of

competitors may influence efficiency scores without being alterable by

the DMUs [Banker R. D.; Morey R. C. (1986a)]. These variables are

called nondiscretionary variables.

b) Thompson et al. (1986) and Tone (1999) offer a framework for

consensus-making based on expert opinion. Tone, in particular, offers

70
 a framework for deriving quantitative estimates using expert opinion.

Toshiyuki discussed about extended DEA - discriminate analysis,

proposed new methodology for the same and done detailed theoretical

and mathematical analysis. Then he used data set from Japanese

banking industry and compared the performance of the extended DEA-

DA with other discriminate analysis methods.

c) Although benchmarking in DEA allows for the identification of targets

for improvements, it has certain limitations. A difficulty addressed in

the literature regarding this process is that an inefficient DMU and its

benchmarks may not be inherently similar in their operating practices.

This is primarily due to the fact that the composite DMU that

dominates the inefficient DMU does not exist in reality. To overcome

these problems researchers have utilized performance-based clustering

methods for identifying more appropriate benchmarks (Doyle & Green

(1994); Talluri & Sarkis (1997)). These methods cluster inherently

similar DMUs into groups, and the best performer in a particular

cluster is utilized as a benchmark by other DMUs in the same cluster.

d) Traditional DEA models do not allow for ranking DMUs, specifically

the efficient ones. Also, it is possible in DEA that some of the

inefficient DMUs are in fact better overall performers than certain

efficient ones. This is because of the unrestricted weight flexibility

problem in DEA. Thus, a DMU can achieve a high relative efficiency

score by being involved in an unreasonable weight scheme (Dyson &

Thannassoulis(1988);Wong & Beasley, (1990)). Such DMUs heavily

71
 weigh few favorable measures and completely ignore other inputs and

outputs. These DMUs can be considered as niche members and are not

good overall performers. Cross-efficiencies in DEA is one method that

could be utilized to identify good overall performers and effectively

rank DMUs (Sexton et al. (1986)). Cross-efficiency methods evaluate

the performance of a DMU with respect to the optimal input and output

weights of other DMUs. The resulting evaluations can be aggregated in

a crossefficiency matrix (CEM). In the CEM, the element in /th row

and/h column represents the efficiency of DMU j when evaluated with

respect to the optimal weights of DMU ,. A DMU, which is a good

overall performer, should have several high cross efficiency scores

along its column in the CEM. On the other hand, a poorly performing

DMU should have several low values. The column mean can be

computed to effectively differentiate between good and poor

performers (Boussofiane et. al, 1991).

e) A limitation in using the CEM is that the factor weights obtained may

not be unique. This undermines the effectiveness of the CEM in

discriminating between good and poor performers. Some techniques

have been proposed for obtaining robust factor weights for use in the

construction of the CEM. Doyle and Green (1994) have developed a

set of formulations for this purpose. The one that is most appropriate

for this discussion is the aggressive formulation, which identifies

optimal weights that not only maximize the efficiency of a unit but also

72
 minimize the efficiency of the average unit that is constructed from the

other n - 1 units (Doyle and Green (1994)),

f) Talluri (2000) proposed a variation to the Doyle and Green model,

which compares a pair of DMUs each time. In this model, the target

DMU (evaluator) not only maximizes its efficiency score but also

minimizes the efficiency score of each competitor in turn. Therefore,

the optimal weights of the target DMU may vary depending on the

competitor being evaluated. In essence, the target DMU can involve

multiple strategies (optimal solutions or the input and output weights),

that is, it emphasizes its strengths, which are weaknesses of a specific

competitor. These results can be incorporated into a CEM to identify

good overall performers. Sarkis and Talluri (1999) extended the above

case to include both cardinal and ordinal input and output factors,

which is based on the work by Cook et al. (1996). They proposed a

combination of models that allowed for effective ranking of DMUs in

the presence of both quantitative as well as qualitative factors. These

models are also based on cross-evaluations in DEA.

g) Other ranking methods that do not specifically include cross­

efficiencies were proposed by Rousseau and Semple (1995), and

Andersen and Petersen (1993). Rousseau and Semple (1995)

approached the same problem as a two-person ratio efficiency game.

Their formulation provides a unique set of weights in a single phase as

opposed to the two-phase approaches presented above. Andersen and

Petersen (1993) proposed a ranking model, which is a revised version.

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 In this version of DEA based upon comparison of efficient DMU’s

relative to a reference technology spanned by all other units is

developed. In this model, the test DMU is removed from the constraint

set allowing the DMU to achieve an efficiency score of greater than 1,

which provides a method for ranking efficient and inefficient units.

The procedure provides a frame work for ranking efficient units and

facilities comparison with rankings based on parametric methods.

h) The size of the data set is also an important factor when using some of

the traditional DEA models. As a general rule, with five inputs and five

outputs, at least 25 or so units will appear efficient and so the set needs

to be much greater than 25 for any discrimination. However, some of

these sample size problems can be overcome by using cross efficiency

models.

i) As mentioned in the previous section, DEA allows for unrestricted

weight flexibility in determining the efficiency scores of DMUs. This

allows units to achieve relatively high efficiency scores by indulging in

inappropriate input and output factor weights. Weight restrictions

allow for the integration of managerial preferences in terms of relative

importance levels of various inputs and outputs. For example, if output

1 is at least twice as important as output 2 then this can be incorporated

into the DEA model by using the linear constraint vl > 2v2. Methods

for incorporating weight restrictions have been suggested by several

researchers. Included in this stream of research are works by Chames

et al.(1990), Dyson and Thannassoulis (1988), Golony et. al. (1988),

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 Thompson et al. (1986, 1990, 1995), and Wong and Beasley (1990),

Roll et.al. (1993). Roll et.al. (1993) suggested a conceptual frame work

for the treatment of factor weights in DEA. They proposed general

guide lines for setting bounds on factor weights, then, it develops and

presents alternative methods to limit the range within which these

factor weights are allowed to vary. Allen et.al (1997) classified the

approaches for imposing the weight restrictions into broadly three

categories.

1. Direct Restrictions on weights (Absolute Weight

Restrictions,

Assurance Region I, Assurance Region II)

2. Adjusting the observed input-output levels to capture value

judgments.

3. Restricting weight flexibility by restricting the weighted

inputs and outputs.

All of these methods involve additional information, which is entered

into the analysis the form of constraints, bounds or different objective

functions.

j) Although weight restrictions effectively discriminate between efficient

and inefficient units, ranking DMUs can still be an issue. In order to

allow for a ranking of units in the presence of weight restrictions, a

combination of models proposed by Talluri and Yoon (2000)could be

utilized.

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k) The introduction of categorical variables extends the application focus

of the DEA, The comparison of quite different units was also

addressed by Banker, R. D.; Morey, R.C. (1986). For example bank

branches that are difficult to compare because of different

demographics can be categorized or even binary-coded variables can

be computed. The incorporation of categorical variables into DEA

evaluations can be found in Banker and Morey (1986) and Kamakura

(1988). Some work in the consideration of both cardinal and ordinal

factors in DEA can be found in Cook et al. (1993, 1996), Sarkis and

Talluri (1999).

l) The former described models, all focuses analysis of one period

situation only. In order to capture the variations of efficiency over

time, Chames et al. (1985) proposed a technique called ‘window

analysis’ in DEA. Window analysis assesses the performance of a

DMU over time by treating it as a different entity in each time period.

This method allows for tracking the performance of a unit or a process.

For example, if there are n units with data on their input and output

measures in k periods, then a total of nk units need to be assessed

simultaneously to capture the efficiency variations over time.

m) In the traditional window analysis described above, when a new period

is introduced into the window the earliest period is dropped out. A

variation to this method was proposed by Talluri et al. (1997) to

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 effectively monitor the performance of a unit over time and assist in

process improvement and benchmarking. Essentially, this technique,

referred to as the ‘modified window analysis,’ drops the poorest

performing period instead of the earliest period. This allows for a new

period to be challenged against the best of the previous periods and,

thereby, assisting in process improvement and benchmarking.

n. Apart from the above mentioned areas, there is significant work in the
areas of stochastic DEA; sensitivity analysis in DEA, target setting in
DEA, more effective ways of weight restrictions in DEA is being
carried. Some of the interesting extensions in this area can include the
improvement of discriminatory power of non-constant returns to scale
models, better methods for benchmarking, developing the robustness
of cross-efficiency models, etc.. Multi-output forms of stochastic
production frontiers have been developed but remain highly complex
(Kumbhakar and Lovell (2000)). The development of stochastic DEA
models is currently a key area of research (Resti (2000), and Ruggiero
(2000). Approaches have been developed to capture some of the
random variability in data (e.g. chance constrained DEA). Details on
some of the recent developments in this area are given in Cooper,
Seiford and Tone (2000). Bootstrapping techniques have also been
applied to estimate the effects of random variation on the estimates of
efficiency and methods have been developed to compensate for some
of these effects (Simar and Wilson, 2000). Each of these new models
and methods can be useful in a variety of manufacturing and service

areas.

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3.18 Application of DEA Methodology in Various Sectors

This section provides a review of various applications of DEA in various

sectors with special focus on weight restriction models that have been

published in the DEA literature (Amit K, 2001). In each application,

determination of bound values and affect of weight restrictions on the results

were discussed.

DEA is receiving increasing importance as a tool for evaluating and

improving the performance of manufacturing and service operations. It is most

useful when a comparison is sought against "best practices" where the analyst

doesn't want the frequency of poorly run operations to affect the analysis.

This approach has been used in a variety of empirical settings. Examples

include program evaluation (Chames, Cooper and Rhodes (1981)), evaluation

of school district efficiencies (Bessent et. al. (1983)), productivity

measurement for manufacturing operations (Banker (1985), Banker and

Maindiratta(1986)). Some other settings in which the DEA technique has been

employed are steam-electric power generation (Banker (1984)), coal mines

(Byrnes, Fare and Grosskopf (1984)), Pharmacy stores (Banket and Morey

(1986a)) and fast-food restaurants (Banker and Morey (1986b)).

Ramanathan (2001) used DEA method for comparative performance

appraisal of schools in Netherlands. He has improved the results over quality

cards and also some post optimal analysis on the basis of program of studies

and locations of schools. Finally he has done regression analysis of the DEA

efficiencies. Beasley (1989) presents a quantitative model for comparing

various university departments concerning the same discipline. His model is

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based upon ideas drawn from the DEA. Computational results are given for

chemistry and physics departments in the United Kingdom.

Smith (1989) applied DEA to financial statements. According to him,

ratio - analysis has been tool of analysis for as long as financial statements

have been prepared. Yet it is limitations to considering only one numerator

and one denominator severely limit its usefulness. This paper extends the

traditional ratio analysis to permit the incorporation of any number of

dimensions of production measures of corporate efficiency, together with a

wealth of supporting information. The strength and weakness of the method

applied to financial statements are appraised.

The study made by Roy et. all. (1991) combined DEA with regression

modeling to estimate relative efficiency in the public school districts of

Connecticut. Factors effecting achievements were classified as school inputs

and other socio economic factors. DEA was performed with the school inputs

only. Efficiency measures obtained from DEA are subsequently related to

socio - economic factor in a regression model a one - sided disturbance term.

The findings suggest that while productivity of school inputs varies

considerably across districts this can be ascribed to a large extent to

differences in the socio - economic back ground of the communities served.

Variation in the managerial efficiency is much less than what is implied by the

DEA results.

DEA has also been utilized as a resource allocation tool. A good example of

its use in resource allocation can be found in Bessent et al.(1983) Doyle et.

al. (1991) tried to compare products which vary excellence along a number of

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dimensions using DEA, this method was illustrated by comparing published

bench marks of 37 computer printers. Mahendra Raj et al.(2002) used this

approach to provide a benchmark to measure for the operational efficiency

of restructured companies that have reduced staff numbers and also companies

that have found it necessary to downsize due to declining demand for its

product.

Srinivas.T. et al. (2000) demonstrated the applicability of Cone-Ratio DEA

(CRDEA) to the Advanced Manufacturing Technology (AMT) selection

process.

Srinivas.T. et al. (2006) used this approach in the area of purchasing, in

general, and vendor evaluation, in particular. Cook et al. (1990) used absolute

weight restrictions DEA model for measuring the Relative Efficiency of 14

Highway Maintenance Patrols Thompson et al. (1992) a DEA/AR efficiency

analysis of 7 years (1980 - 1986) was made for 45 oil / gas firms called

independents.

A comparative evaluation of six competing sites was carried out using

DEA is carried out by Thompson et.al (1996a) to determine the ideal site for

locating a high energy physics lab. The assurance region was applied to the

site location problem; it was found that the region of dominance of one of the

sites, in the weight space, completely enclosed the assurance region.

Therefore, this site was the only one with efficiency score of 1 and was also

the preferred site. Thompson et.al (1996b) the efficiency and profit potential

of 14 integrated oil companies were measured by using DEA model AR

bounds. Thompson et al. (1996c) solved the AR-DEA model for 48 banks for

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the years 1980 - 1990 computing DEA/AR Efficiency and Profit Ratio

Measures with an Illustrative Bank Application.

Zhu etal (1996) employed the data envelopment analysis/assurance region

(DEA/AR) methods to evaluate the efficiency of the 35 textile factories of the

Nanjing Textiles Corporation (NTC), Nanjing China. By specifying input and

output cones, a cone-ratio assurance region (CR-AR) was set up. While most

existing approaches involving Assurance Regions use "price/cost" data to

determine values of the bounds, AR's were developed based on expert

opinions on the relative importance between various inputs/outputs. NTC uses

the Analytic Hierarchy Process (AHP) to gather and present expert opinion for

systematically evaluating the overall industrial performance. The results from

the AHP were used in this paper to set bounds on the weights.

DEA and linked-cone assurance region models were used by Taylor et.al

(1997) to investigate the efficiency and profitability potential of Mexican

banks. Schanffnit et.al (1997) has carried out a best practice analysis of the

Ontario based branches of a large Canadian Bank using AR/DEA.

Thanassoulis et al. (1995) explores the use of DEA to assess units

providing perinatal care (District health Authorities, DHAs) in England

Chilingerian and Sherman (1997) used the assurance region model to spot

inefficiencies in the practice patterns of primary care physicians (PCPs).

3.19 Applications of DEA in Mining Sector

Bynes et. al. (1984) applied a generalized version of the Farrell measure of

technical efficiency to a sample of Illinois mines. They disagreed the original

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Farrell measure (which was designed to measure lost output or wasted inputs

due to under utilization of inputs) into three mutually exclusive and exhaustive

components: (1) a measure of purely technical efficiency, (2) a measure of

input congestion and (3) a measure of scale efficiency. Their paper describes

the details of non - parametric approach of performance measurements, case

study, discussion and conclusion.

Ramani et, al. (1988) discussed about problem with traditional mine

management and its unique characteristics. They identified the need for

improvement of performance in mining systems and suggested some

alternative approaches of mine system design and its analysis.

Bhattacherjee (1999) carried out the analysis using 21 UG coal mines by

taking total salaries and wages, total store expenses, power expenses, interest,

administrative expenses and other expenses as inputs and annual revenue as

output by using CCR model and compared the efficiencies of the UG mines.

Thomson et. al. (1995) considered the case of application of a modified

DEA to Illinois coal mine. The conventional DEA measures technical

efficiency and it is recognized that bounds must be introduced into the

measurement process proceedings from technical efficiency to overall

efficiency. Thomson et. al. (1986), (1990) used economic/environmental price

data (beyond the input - output data per se) and expert opinion to bind the

multipliers. These modified models have a profit maximizing linear objective

function. The authors content that DEA technical efficiency does not imply a

DEA maximum profit ratio and vice - versa. The analysis of Illinois coal

mines is used to substantiate this claim.

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 The data used in Bynes et. al. (1984) was reformulated and used for this

study by Thomson. The capacity inputs were defines in real capital term and

aggregated into a single capital input:

K=kl+K2+k3

The four geographical characteristics were consolidated into one mine quality

input: T= (T1/D1+T2/D2)

The input corresponding to mine quality gives a measure equivalent to

inverse of an aggregated stripping ratio i.e., tons of coal per ton overburden.

The output was taken as thousand tons of coal mined and inputs were

thousand labor days. Thousand dollars of investment is capital (to a base year)

and tons of clean coal per thousand tons of overburden.

One notable feature in this study is that by aggregation of input factors. The

total number of inputs and outputs has been brought within the limit set by

widely acknowledged thumb rules with respect to the number of DMUs.

Another feature of this study is that the role of profitability in decision making

is examined. If both profitability and efficiency scores are available, units can

be assessed on an efficiency profitability matrix (boussofiane et.al 1991).

Units which both profitable and efficient provide examples for good operating

practices; those which are not efficient (irrespective of profitability) can be

subjected to an efficiency drive and those which are efficient but not profitable

calls for close scrutiny of operating environments. The study shows that the

numbers of DMUs which are efficient in the presence of additional assurance

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region constructs are lower than in a normal DEA which shows the need to

restrict weight flexibility to achieve more meaningful results.

Niraj Kumar et al (2002) used DEA and fuzzy logic techniques for

comparing 40 UG mine. They had chosen capacity, Man shifts and cost per

tonne as inputs and production, Financial Operating Efficiency Index

(FOEI), Environmental Efficiency Index (EEI) and Safety Efficiency Index

(SEI) as outputs.

Niraj Kumar et.al used a two stage DEA model to rank the mining units.

In the first stage, the DEA is used to get efficiency scores of various mining

units. In the second stage, the AHP is applied to differentiate among mines,

which have the same efficiency score based upon the DEA method. This helps

in further ranking of each mining units. This combined approach not only

helps to overcome the limitations of both the methods, but also enables the full

ranking of all the mines. The application of this combined approach is

demonstrated through a case study example of a group of 20 open cast coal

mines by taking capacity, Man shifts and cost per tonne as inputs and

productivity, Financial Operating Efficiency Index (FOEI), Environmental

Efficiency Index (EEI) and Safety Efficiency Index (SEI) as outputs.

84