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Resource Allocation Based on Efficiency Analysis

Author(s): Pekka Korhonen and Mikko Syrjänen
Source: Management Science, Vol. 50, No. 8 (Aug., 2004), pp. 1134-1144
Published by: INFORMS
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MANAGEMENT SCIENCE in!~D
Vol.50,No. 8, August2004,pp. 1134-1144 DOI10.1287/mnsc.1040.0244
1EISSN 1526-55011041500811134
ISSN 0025-1909 C 2004 INFORMS

Resource Allocation Based on Efficiency Analysis

Pekka Korhonen,Mikko SyrjTanen
HelsinkiSchoolof Economics,
P.O.Box1210,00101Helsinki,Finland
{pekka.korhonen@hkkk.fi,
mikko.syrjanen@hkkk.fi}

Thepurpose of this paper is to develop an approachto a resource-allocationproblemthat typicallyappearsin

T organizationswith a centralizeddecision-makingenvironment,for example,supermarketchains,banks, and
universities.The centralunit is assumed to be interestedin maximizingthe total amountof outputs producedby
the individual units by allocatingavailableresourcesto them. We will develop an interactiveformal approach
based on data envelopmentanalysis (DEA)and multiple-objectivelinearprogramming(MOLP)to find the most
preferredallocationplan. The units are assumed to be able to modify theirproductionin the currentproduction
possibility set within certainassumptions.Variousassumptionsare consideredconcerningreturnsto scale and
the ability of each unit to modify its productionplan. Numerical examples are used to illustratethe approach.
Keywords:resourceallocation;data envelopment analysis;frontieranalysis;multiple-objectivelinear
programming
History: Accepted by Thomas Liebling,mathematicalprogrammingand networks;received August 22, 2001.
This paper was with the authors4 months for 2 revisions.

1. Introduction maximized. When the number of outputs and inputs

The problem of resource allocation is one of the clas-
sical applications in management science. The use of
data envelopment analysis (DEA) brings a new flavor
to the problem, because it is possible to consider
feasible production plans and trade-offs between
inputs/outputs based on the empirical characteriza-
tion of a production possibility set. Since Charnes
et al. (1978, 1979) developed DEA, it has become a
very popular method for efficiency analysis. DEA is a
widely used method for analyzing technical efficiency,
and based on it, a number of additional methods
are suggested for supporting efficiency improve-
ment planning. The allocation problem is currently
under active research in the DEA literature (see, e.g.,
Athanassopoulos 1998).
Let us consider a decision-making environment in
which a set of units is operating under a central unit
with power to control some decision parameters, such
as resources of those units. The aim of a central unit
is to allocate resources in such a way that the overall
goals of the organization are satisfied as well as pos-
sible, or specifically, the amount of the total outputs
of the units will be maximized.
It is natural to assume that the central unit would
like to allocate the resources in such a way that the
new production plan is nondominated. This means
that no other allocation with the same assumptions
leads to as good values on all outputs and a better
value on at least one output at the given level of
input. Thus, the units are required to modify their
production plan so that the total amount of output is
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is more than one, the problem is a multiple-criteria
one, which usually has no unique solution.
The main limitations of a traditional DEA model in
resource allocation are that (1) it does not take into
consideration the decision maker's (DM) preferences,
and (2) it analyzes one unit at a time in relation to
the other units. The first limitation is discussed in
many articles in the DEA context. Golany (1988) pub-
lished the first paper proposing the use of preference
information when setting performance targets in the
context of DEA. He formulated a multiple-objective
linear programming (MOLP) model, where the out-
puts were objective functions. For the same purpose,
Thanassoulis and Dyson (1992) combined goal pro-
gramming and DEA. The idea is to find the most
preferred target for each unit, when one unit at a
time is considered. Golany et al. (1993) further devel-
oped the target-setting model by suggesting a num-
ber of different models for cases where different kinds
of price, cost, and budget information are available.
Furthermore, many authors have analyzed similari-
ties between DEA and MOLP. For example, see Belton
(1992), Stewart (1996), Joro et al. (1998), or Bouyssou
(1999).
When we consider the second weakness, we can
first notice that a number of DEA models that take
into account the organizational setting have been
developed. For example, Cook et al. (1998) sug-
gested an efficiency analysis model for a hierarchical
situation where the assessed units operate under
different groups. The groups are assumed to control
Korhonen and Syrjinen: ResourceAllocationBasedon Efficiency
Analysis
ManagementScience50(8),pp. 1134-1144,
@2004INFORMS
a part of the resources, which affects the possibilities,
and thus the observed efficiency, of the individual
units. Fare and Grosskopf (2000) proposed a number
of models for situations where the production process
is divided into a number of subprocesses. One of the
models is an allocation model, where a fixed input
like farmland is allocated among alternative uses like
various crops within one unit. The primary goal of
the models is to measure the efficiency of the units.
Our purpose is to consider resource-allocation
models, which help the DM to allocate available
future resources by taking into account the total
amount of the outputs of all units, simultaneously.
Golany et al. (1993) presented an idea to use a
target-setting model for allocating resources so that
the objectives of the whole organization are consid-
ered. On the basis of this idea, Golany and Tamir
(1995) developed an allocation model and a number
of extensions to it. An envelopment DEA model is
the framework that is used to characterize an efficient
frontier and a production possibility set. The model
resembles the target-setting DEA models (e.g., Golany
1988, 1993; Thanassoulis and Dyson 1992), but all the
units are considered at the same time, and the basic
objective is to maximize the sum of outputs of all the
units.
Further, Athanassopoulos (1995, 1998) presented
two resource-allocation models. The first model
(Athanassopoulos 1995) is based on goal program-
ming and DEA. In this so-called Go-DEA model, an
efficient frontier is characterized as in an envelopment
DEA model. The second model (Athanassopoulos
1998), called TARBA, is based on a framework sim-
ilar to that of Go-DEA. The model is solved in two
phases. First, the optimal multipliers for each unit are
found by means of a multiplier DEA model. Then,
the multipliers are used to define feasible trade-offs
in allocation.
The assumptions that concern the units' ability
to change their input-output mix and efficiency are
clearly some of the key factors affecting the results
of the resource allocation. Although many valuable
ideas have been proposed concerning these assump-
tions, the decision-making units' (DMUs') ability to
change their input-output mix and efficiency has
not been discussed thoroughly in the literature. In
addition, the multiple-criteria nature of the resource-
allocation problem has drawn only limited attention.
The purpose of this paper is to develop a general
multiple-objective approach to resource allocation. We
assume that a central unit simultaneously controls all
the units. Hence, the setting is similar to the above-
mentioned papers that introduce resource-allocation
models.
In the developed approach, the units' abilities to
change their production are modeled explicitly. The
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1135
current input and output values are used to charac-
terize a production possibility set in a manner similar
to that of Golany and Tamir (1995). To guarantee a
realistic allocation, we assume that the units are able
to modify their production plan within the produc-
tion possibility set only according to certain rules. In
this aspect, we generalize and extend the ideas sug-
gested by Golany et al. (1993) and Golany and Tamir
(1995). The rules represent factors (managerial, envi-
ronmental, etc.) that limit possible changes during the
planning period. One of the key questions is what
happens to the observed inefficiency.
The approach is formulated as a MOLP model and
is solved by using approaches developed for MOLP.
In this aspect, our approach clearly deviates from
the earlier papers. Using the MOLP model, the DM
(a central unit) can search for the most preferred
resource-allocation solution by trying to maximize the
amount of several objectives simultaneously.
The approach and its variations are illustrated by
using a supermarket data set that is extracted from a
real application.
The rest of this paper is organized as follows. Sec-
tion 2 discusses some theoretical aspects of MOLP
and DEA. In s3, we develop the general approach for
resource allocation and present some specific models
based on different assumptions. An illustration of an
allocation problem with multiple inputs and outputs
is given in s4. Conclusions and discussion are pre-
sented in s5.
2. Preliminary Considerations
Let us assume that we have n DMUs, each consum-
ing m inputs and producing p outputs. Let X e rxn
and Y E be the matrices, consisting of nonnega-
R+ and
tive elements containing the observed input and
output measures for the DMUs. We denote by xi (the
ith column of X) the vector of inputs consumed by
DMUi, and by xj, the quantity of input j consumed by
DMUi. A corresponding notation is used for outputs.
Furthermore, we denote 1= [1, ..., 1]T and refer by ei
to the ith unit vector in 9n.
2.1. Multiple-Objective Linear Programming
Consider the following multiple-objective linear
program:
Max y
Min x
s.t. (Y)ET= {(y XX,
Iy Y, x A,
Xie
10Ax 0,
 Korhonen and Syrjinen: Resource
1136
where A = { ih Xe and AAX b} C ln is a feasible
set, matrix A e +is Of full row rank k and vec-
fMkxn
tor b E fk. The set T of feasible values of vector
(y)E 9m+p is called a feasible region. The purpose of
the model is to find a feasible linear combination of
the input/output vectors of the existing DMUs that
simultaneously maximizes all outputs and minimizes
all inputs. The problem, like any multiple-criteria
model, has no unique solution in general. Its "rea-
sonable" solutions are called efficient solutions in the
multiple-criteria decision-making (MCDM) literature.
DEFINITION 1. A point (Yi)e T is efficient (nondom-
inated) iff (if and only if) there does not exist another
(Y)ET such that y y*, x x*, and (() (Y:).
DEFINITION _ e T is weakly
2. A point (Y) - efficient
(weakly nondominated) iff there does not exist
another (() e T such that y > y* and x < x*.
The solution of Problem (1) is the efficient point that
the DM prefers most. That solution is called the most
preferred solution. Note that a subset of inputs and/or
outputs may be used as objective functions as well.
The inputs and outputs not used as objective functions
may be treated as constraints. The feasible set and the
efficient frontier will be changed accordingly.
In principle, a multiple-objective optimization prob-
lem can be solved by using any MOLP technique (for
more information, see, e.g., Steuer 1986). A possible
and currently popular way to search for solutions on
the efficient frontier of a MOLP problem is to use
the achievement (scalarizing) function suggested by
Wierzbicki (1980). Using that function, we may project
any given (feasible or infeasible) point in the objective
space onto the efficient frontier. The method is called
a reference point method, and the components of the
given reference points are called aspiration levels. The
DM can vary the aspiration levels as (s)he likes, and
any efficient solution of a MOLP problem can be gen-
erated (Wierzbicki 1986). The procedure can be con-
tinued until the most preferred solution is found.
By parameterizing the achievement scalarizing
function, it is possible to project the whole vector--
instead of a single point-onto the frontier, as orig-
inally proposed by Korhonen and Laakso (1986).
When a direction is projected onto the frontier, a curve
traversing across the frontier is obtained. That method
is called a reference direction method. Korhonen and
Wallenius (1988) further developed a dynamic and
visual "free-search" version of the reference direction
method. The idea is implemented under the name
Pareto Race (see, e.g., Figure 4).
In Pareto Race, a reference direction is determined
by the system on the basis of preference information
received from the DM. By pressing number keys cor-
responding to the ordinal numbers of the objectives,
the DM expresses which objectives (s)he would like to
improve and how strongly. In this way (s)he implicitly
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AllocationBasedon Efficiency
Analysis
ManagementScience50(8),pp. 1134-1144,C2004 INFORMS
specifies a reference direction. Pareto Race enables the
DM to freely search any part of the efficient frontier
by controlling the speed and direction of motion. The
DM sees the objective function values on a display in
numeric form and as bar graphs, as (s)he travels along
the efficient frontier. The keyboard controls include an
accelerator, gears, brakes, and a steering mechanism.
The search on the frontier resembles driving a car.
The DM can, e.g., increase/decrease the speed, make
a turn, and brake at any moment (s)he likes. The DM
may stop the search whenever (s)he likes.
The original reference point approach can be
applied to any size of problems, because it can
be implemented in an interactive or noninteractive
mode. Instead, Pareto Race performs best in medium-
size problems in which the DM wants to keep the
control in his/her own hands at all times.
2.2. Basic Models in Data Envelopment Analysis
In the DEA literature, the above-defined set T is called
the production possibility set. Because in DEA all
units are feasible solutions, we have to assume that
the unit vectors ei E A, i= 1,..., n. We are interested
in recognizing efficient DMUs, which are defined as a
subset of points of set T satisfying the efficiency con-
dition defined in the same way as in Definitions 1
and 2. Thus, the methods used to search for efficient
(nondominated) solutions of the MOLP problems can
be used to characterize the efficient frontier in DEA.
In DEA, the production possibility set is tradition-
ally defined by assuming that (a) A = or (b) A =
{ ix e
E 15 and 1TX = 1}. The first 9+
definition stands
for the so-called Constant Returns to Scale (CRS)
assumption (Charnes and Cooper 1978, 1979); the sec-
ond one stands for the Variable Returns to Scale (VRS)
assumption (Banker et al. 1984). The standard models
based on the above assumptions are also called the
CCR model and the BCC model, correspondingly.
The output-oriented inefficiency score oi of DMUi
can be defined by solving the problem
Max{ ( +i i }
oi
Instead of inefficiency scores, efficiency scores are
usually reported in the DEA literature. In this case,
the efficiency score 0 can be calculated from the inef-
ficiency score; i.e., 0 = 1/(1 + o~).
3. Development of an Approach to
Efficient Resource Allocation
By the term "efficient resource allocation," we refer to
the decision problem in which a DM (a central unit)
aims to allocate additional resources and/or to reallo-
cate the current resources to a set of existing units for
achieving the "maximal" output. The problem usually
 AllocationBasedon Efficiency
Korhonen and Syrjinen: Resource
ManagementScience50(8),pp. 1134-1144,C 2004 INFORMS
has no unique solution. Any efficient solution is a
rational choice.
In the following, we develop a general multiple-
objective model for efficient resource allocation. The
DM is searching for the most preferred resource-
allocation solution by trying to maximize the amount
of several output variables simultaneously. The
approach starts from the current practice. The cur-
rent measured input and output values are used to
estimate a production possibility set. We assume that
(re)allocation does not change the set. Furthermore,
we assume that the units are able to modify their
production in the defined production possibility set
only according to certain limits that represent factors
(managerial, environmental, etc.) that limit possible
changes during the planning period. We will consider
various assumptions that all lead to a linear model
formulation. The general approach and its variations
are illustrated by using supermarket data, originally
from a real application.
For simplicity and without loss of generality, we
assume that the inputs are resources to be allocated
and the outputs are objectives to be maximized. The
approach can easily be extended to a case where the
input variables are minimized or any combination of
input and output variables is optimized. The allo-
cation problem is a multiple-criteria problem when
there is more than one objective.
The general multiple-objective resource-allocation
model can be formulated as follows:
Max Ay = AY1= [Ay1, Ay2, ..., Ay]n
s.t. = y Y,
xi + Axi
Yi-YiET (x
x is able to reach any point on the efficient frontier. We
A= {| h e 9t and
y>_0,
A <x>_0
b},
(yi+Ayxi eFi,
i=1,2,...,n,,
Ax = AX1= [Ax1,Ax2,x,
..., Axnl < r,
where
* Vectors
+ (b) specify that a unit is allowed to change the
( x+Ax1) ",
(yi
+ =1,2,...,n,
describe the input-output mix after an allocation. To
be feasible, the new production plan of each unit has
to belong to the production possibility set T.
*
Fi is the set of production plans that unit i
is assumed to be able to reach, and it is called
the transformation possibility set. In general, set Fi
includes all the managerial, political, environmental,
etc., factors that restrict the ability of unit i to modify
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Analysis
1137
its current position in the planning period. The set
thus describes the possible changes in outputs after
resource allocation.
* Vector re m stands for the total amount of
allowed resource changes, i.e., the budget constraint.
For example, r < 0 relates to a situation where
the total use of resources is reduced. Vector r thus
describes the objectives related to inputs.
The production possibility set describes all tech-
nically feasible production plans while the transfor-
mation possibility set describes the unit's ability to
change its production within a planning period. The
DM's preferences and values are taken into consid-
eration in the objective function and corresponding
restrictions on input changes.
One possible basis for the transformation possibil-
ity set is to assume that the unit's efficiency stays con-
stant during the planning period. Another possible
assumption could be to allow only proportional scal-
ing of the existing production. Or, we could set a
"price" for the change and thus subtract a proportion
of the potential output or allocated input relative to
the amount of change. Also, it has been suggested that
one could set limits to the changes in the factors that
are not fully controllable. For example, Golany and
Tamir (1995) suggested relative constraints for par-
tially discretionary variables to guarantee managerial
feasibility in allocation. In the transformation possi-
bility set we can also fix the change so that environ-
mental or nondiscretionary variables are not changed.
Depending on the assumptions made on the trans-
formation possibility sets Fi, i= 1,2,..., n, and the
production possibility set T, we may generate models
for various situations. Traditionally, the DEA litera-
x>X, EA,
ture assumes that Fi = T, i = 1, 2,..., n, and the unit
want to emphasize that it is important to consider
, n,
i-1,2,..., potential limitations of the change in the unit's pro-
duction during the planning period.
To illustrate the usability of this definition, we
consider the situations based on the following
assumptions:
* The transformation possibility sets F,, i = 1,
(2) 2,...,n:
(a) allow simultaneous proportional scaling of all
the inputs and outputs,
input and the output values, but no improvement in
efficiency is allowed.
A limitation for the change in inputs is included in Fi,
i.e., Axi e {Ax I -xi < ai < Ax < 3,}. This describes
ranges for feasible resource changes of units. Note
that in the situation where ai is allowed to be equal
to -xi, it is possible that Ax = -x,. This means that
DMUi will be taken out of business. Thus, the model
can also be used to analyze which business is worth
continuing.
All use subject to JSTOR Terms and Conditions
 Korhonen and Syrjiinen:Resource
AllocationBasedon Efficiency
Analysis
1138 ManagementScience50(8),pp. 1134-1144,02004 INFORMS

Table1 TheDataSetforIllustrative
Examples Thus, the allocation model looks as follows:
Unit Input Output Max Ay = AY1= [Ay1, Ay2, ... AYn]
A 1 1
B 1.5 2 s.t.
( eT- (
j y Y(, x> XX, e A,
C 2.5 3
D 4 3.5
E 2 1.5 i=1,2,...,n,
y>O,x>O},
Total 11 11
A= n29
* In both cases the production possibility set T is + y
Yi F = ~ i (3)
ix }
based on both CRS and VRS assumptions. xi + y +
--yi{
Axi i Xi -/yi "i
-- Ayi <
We would like to emphasize that the above assump- " Ax,] i,

tions are set up for illustrating the possibilities of our 8i=min x ..,m,
j=-1,2,
approach. The assumptions are problem dependent Ai
and should be selected carefully in each application.
Models based on different assumptions are first -xi ai Ax <
1i,
illustrated using a simple data set consisting of five Ax= [AIx,AX2,...,- AXnll
- r.
DMUs consuming one input and producing one out-
put (Table 1). Based on the definition of T, we know that (Y) e T
Using the simple example, the results can be illus- and (1+ e T for .> -1. From the definition of
trated with figures. Because this data set leads to a 8i)(x)
the transformation possibility set F,, it follows that iff
single objective, it is not enough to illustrate how
to deal with multiple input/multiple output features, (,+Axi) E Fi, then + Ayi) < Yi(1 + 8i) A (xi + Axi)
(yi
a -
which play an essential role in our approach. For xi(1 + 8i) A -x < Ax <fi. Thus, E Fi
i (I'+A'i)
that purpose, we will use a more complex multiple- eT for all 8.> -1. This means that as the max-
objective problem in s4. The latter problem also imum i increase in outputs is the same as the mini-
demonstrates how the approach works in practice. mum increase in inputs, the transformation possibility
sets Fi are subsets of the CRS production possibility
3.1. Transformation Possibility Sets Based on set. Hence, it is sufficient to only consider propor-
Proportional Change in All Inputs and tional changes of input and output variables, and the
Outputs problem can be written as a MOLP problem in the
In this subsection, we assume that the unit's ability following way:
to change is based on proportional scaling of existing
production. Thus, we assume that the transformation Max Ay = AY1= [Ay1, Ay2, ..., Aynl
possibility sets are s.t. Ayi < iYi, i= 1, 2, ..., n,
F )yi) Axi > Xi, i=1,2,...,n,(
Xi Ayi ,
Fi{(Yi++ Axi Yiyi}
+r

Bi=min -xi Axi Ai, i =1,2,..., n,

Axi
i j -=1,2,...,m, i <-i
<-
AX= [Ax1, AX2,..., AXnl r.
The assumption means that a DMU can transform
its output values so that the smallest ratio pro- Using the data presented in Table 1, we may illus-
Axji/xji Note
vides an upper bound for changes in outputs. trate possible solutions to this problem. Now the
that 8i can be negative as well if the amount of some problem has one input and one output and is thus
input is decreased. To guarantee that the proportional reduced to an LP problem. We specify the model
scaling is managerially feasible, we limit the change parameters so that
in inputs to be -xi < at Ax < Pi. The proportional
n
scaling is thus assumed to be valid in the neighbor-
hood of the units' current production. r = 0.1 x1xi,
i=1
Let us now assume a convex production possibility
set based on the CRS assumption, i.e., ai O, 1i = 0.2xi.

h The results of the problem are presented in Table 2

T=() y Yh, xX Xh, A, y Ox0O,
x_0 , A=-. and the changes are illustrated in Figure 1.
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Korhonenand Syrjainen:ResourceAllocationBasedon Efficiency
Analysis
ManagementScience50(8),pp. 1134-1144,C2004 INFORMS 1139

Table2 Allocation
BasedontheCRSProduction Setand
Possibility Table3 Allocation
BasedontheVRSProduction Setand
Possibility
Proportional Transformation
Change Proportional
ChangeTransformation
Observed Allocated Observed Allocated
Unit Input Output Input Output Unit Input Output Input Output
A 1 1 1.2 1.2 A 1 1 1.2 1.2
B 1.5 2 1.8 2.4 B 1.5 2 1.8 2.3
C 2.5 3 3 3.6 C 2.5 3 2.7 3.07
D 4 3.5 4.1 3.59 D 4 3.5 4 3.5
E 2 1.5 2 1.5 E 2 1.5 2.4 1.8
Total 11 11 12.1 12.29 Total 11 11 12.1 11.87

The model allows the units to move along (actually Let us next assume that the production possibilities
below) the rays starting from the origin and passing are based on the VRS assumption, i.e.,
through the corresponding unit. Thus, the unit with
the highest productivity is first allocated more input T= y YX, x >XX, X e A, y> 0, O},
{(Y) x>
until the upper bound is reached. Because the change
in the unit's input is bounded, the extra input is allo- A= e t+,
{tXIh lTX =1}.
cated to the unit with the next highest productivity,
In this case the transformation possibility sets are
until the limit is reached. Units A, B, and C reach the
not subsets of T, and thus both constraints have to be
relative (+20%) upper limit and the budget constraint
explicitly included in the problem formulation. Thus,
is met, while Unit D is being allocated some more the model can be formulated as follows:
input. Because the restriction on the increase in input Model (4) and the following constraints:
is relative, the absolute increase in the input depends
on the observed size of the unit. If more appropriate, Yi + Ayi < YXi, i= 1, 2,..., n,
we can naturally also use an absolute limit.
The model with the CRS production possibility set xi + Axi X i, n
-=1,2, (5)
and the proportional change is quite simple. The addi- 1T i,= 1, i=1,2,...,n,
tional resources are first allocated to efficient units
hi 0 i =1, 2.n
(with the highest marginal productivity) until the
upper bound of the input change is reached. If we Results based on the same data and the same values
would allow the input to be reduced, it would first of the parameters as above are presented in Table 3
be taken from units with the lowest marginal produc- and the changes are illustrated in Figure 2.
tivity. Of course, the multiple-objective case is more As before, the unit with the highest marginal pro-
complex, because the trade-off between objectives has ductivity is the first to be allocated more input. In
to be considered. In any case, the CRS efficiency score this case, the marginal productivity of a unit is not
of the units remains unchanged, and only the relative just dependent on its observed productivity. Units A
size changes. and E can increase their output as in the previ-
ous case, along the ray starting from the origin and
1
Figure of theAllocation
Illustration BasedontheCRSProduction
SetandProportional
Possibility Change 2
Transformation Figure of theAllocation
Illustration BasedontheVRSProduction
SetandProportional
Possibility Transformation
Change
4.0
4.0-
3.5
D 3.5-
D
3.0 C 3.0-
C
2.5 2.5-
2.0 B 2.0- B
Output Output
1.5 Observed 1.5- E Observed
"E
1.0 SAllocated 1.0- SAllocated
A A
0.5 0.5

0.0 0.0
O i 2 3 4 5 0 1 2 3 4 5
Input Input

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 Korhonenand Syrjinen: Resource
AllocationBasedon Efficiency
Analysis
1140 ManagementScience50(8),pp. 1134-1144,C 2004 INFORMS

passing through the unit, because the production pos- Table4 Inefficiencies
oftheUnits
sibility set does not restrict the changes defined by Unit Input Output CRSinefficiency VRSinefficienc!
the corresponding transformation possibility sets (Fi).
Instead, the possible changes of Units B, C, and D are A 1 1 0.33 0
B 1.5 2 0 0
restricted by the VRS production possibility set, and
C 2.5 3 0.11 0
their marginal productivity is thus lower than in the D 4 3.5 0.52 0
CRS case. Thus, Units A, B, and E reach the upper E 2 1.5 0.78 0.67
limits for input increase. Total 11 11
3.2. Transformation Possibility Sets Based on
Unchanged Efficiency To illustrate the behavior of the model, we use the
In this section, we assume that the inefficiency same data and the same specifications as in the previ-
score oi of the unit i with the observed input and ous section. The data and the inefficiencies based on
output values (Y) is not worse than the inefficiency output-oriented CRS and VRS DEA models are pre-
score a-newof the transformed unit with input and out- sented in Table 4.
put values (Yl y); i.e., oi a n"ew. The key idea is to In the simple case (one input, one output, and CRS),
allow a change in the input-output mix while keeping the results are the same as presented in Table 2. How-
the technical inefficiency unchanged. ever, in a case of multiple inputs and multiple out-
Golany and Tamir (1995) suggested this kind of puts, the DM has to consider the trade-offs between
approach, as it is likely that units that were inefficient inputs and outputs. Hence, the DM considers the allo-
in the past will remain inefficient. However, they did cation problem not only as a scaling problem, but
not present a formal model based on this assump- he is also free to change the mix of inputs and out-
tion. Different efficiency measures (e.g., input- versus puts. This increases the flexibility of the model and
output-oriented or radial versus additive) can be provides the DM with more possibilities. In the next
used. They lead to different results, and therefore the section, we demonstrate this feature with an example
way of measuring the inefficiency should be selected having two outputs and two inputs.
carefully. Similarly, we can assume that the production pos-
To give an example, we build a model based on sibility set is based on VRS assumption. The corre-
an output-oriented relative inefficiency measure. Ini- sponding model is simply:
tially, we determine inefficiency scores oi for each Model (6) and the following constraint:
unit, i= 1,2,..., n, using a suitable DEA model. In
the allocation model, we limit the efficiency change 1Th, =1, (7)
by formulating the transformation possibility sets in
the following way: Results with this model are presented in Table 5
and illustrated in Figure 3.
+ The marginal productivity of a unit now depends on
l Ayi -i)(Yi eT and
Fi I Yi f
xi + axi / ((1+ + axi AYi))
/ the marginal productivity of the frontier and the unit's
inefficiency.Unit A can move along the line AB, and it
- xi 5 5 A has the highest marginal productivity. Unit B has the
1i-xi c~ui~at i
second-highest marginal productivity (along the line
Each set Fi, i = 1, 2,..., n, is a subset of the pro- BC). Unit E is projected to the point E' on the fron-
duction possibility set T, if T in the inefficiency eval- tier (line BC). The marginal productivity at point E' is
uation is the same as in the allocation model (as we the same as that of Unit B. Hence, the marginal pro-
assume). When T is based on the CRS assumption, ductivity of Unit E is 1/(1 + 0.67) times that of Unit B.
we can reformulate the general allocation model (2)
as the following MOLP model: Table5 ResultsoftheAllocation
withtheVRSProduction
Possibility
SetandConstant Transformation
Efficiency
Max Ay = AY1= [Ay1, Ay2, ..., AyInl
Observed Allocated
s.t. (1+ oi)(Yi + Ayi) YA;, i= 1, 2, ..., n,
_ Unit Input Output Input Output
xi + Axi > Xhi, i= 1, 2, ..., n,
A 1 1 1.2 1.4
X*i> 0, i 1,2,...,n, (6) B 1.5 2 1.8 2.3
C 2.5 3 2.7 3.07
Axi a,, i 1,2,..., n, where ai > -xi, D 4 3.5 4 3.5
_ E 2 1.5 2.4 1.74
Axi<Ii, i=1,2 ..., n,
Total 11 11 12.1 12.01
Ax = Ax2,..., AXnll r.
[Axl, _
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Korhonen and Syrjinen: ResourceAllocationBasedon Efficiency
Analysis
ManagementScience50(8),pp. 1134-1144,
C2004INFORMS 1141

3
Figure oftheAllocation
Illustration withtheVRSProduction
Possi- 4. Illustrationof a Problemwith
bilitySetandConstant Transformation
Efficiency
4.0-
Multiple Inputs and Outputs
In this section, we illustrate the use of the proposed
3.5- models in a multiple input and output case. The
D aim is to demonstrate the advanced features of our
3.0-
C
2.5
approach and to illustrate its practical relevance. For
this purpose, we will analyze resource allocation in
E

2.0-
Output B' supermarkets.The data set is extracted from a real-
1.5- SObserved life case, which consists of 25 supermarkets that are
E
Allocated
1.0- A situated in Finland and belong to the same chain. The
0.5-
original problem is simplified by taking into consid-
eration only two output variables (Sales and Profit)
0.0 and two input variables (Man-hoursand Size). Man-
0 1 2 3 4 5
Input hours refers to the labor force used within a certain
period and Size is the total retail floor space of the
However, it is higher than the marginal productivity supermarket. The data set is given in Table 6.
of Unit C. Thus, additional input has been allocated to Two different models are considered as examples.
Units A, B, and E up to the (+20%) limit. In the first case, we assume that the production pos-
By considering Unit E, we may demonstrate the sibility set is based on the CRS assumption, and the
impact of the choice of the orientation in the effi- units are assumed to be able to change their input and
ciency measure on the allocation. The output-oriented output values proportionally in the neighborhood of
approach projects Unit E onto line BC, whereas the the current input-output mix. These assumptions lead
input-oriented approach projects Unit E onto line AB. to the use of model (4).
As we can see from Figure 3, in the latter case the In the second case, we assume that the production
marginal productivity is higher. Similarly, e.g., the use possibility set T is based on the VRS assumption. In
of an additive DEA model would lead to a different addition, we assume that the unit is unable to remove
marginal productivity. or reduce its inefficiency during the planning period.
Table6 DatafortheMultiple andOutput
Input Illustration
Supermarket Sales106FIM Profit106FIM Man-hours
103h Size103m2 CRSoutput Inefficiency
Inefficiency VRSoutput
i Yli Y2i Xli X2i O O

1 115.3 1.71 79.1 4.99 0.248 0.218

2 75.2 1.81 60.1 3.30 0.454 0.295
3 225.5 10.39 126.7 8.12 0 0
4 185.6 10.42 153.9 6.70 0.088 0
5 84.5 2.36 65.7 4.74 0.415 0.300
6 103.3 4.35 76.8 4.08 0.285 0.241
7 78.8 0.16 50.2 2.53 0.109 0
8 59.3 1.30 44.8 2.47 0.375 0
9 65.7 1.49 48.1 2.32 0.246 0
10 163.2 6.26 89.7 4.91 0 0
11 70.7 2.80 56.9 2.24 0.086 0
12 142.6 2.75 112.6 5.42 0.343 0.213
13 127.8 2.70 106.9 6.28 0.522 0.485
14 62.4 1.42 54.9 3.14 0.601 0.359
15 55.2 1.38 48.8 4.43 0.608 0.246
16 95.9 0.74 59.2 3.98 0.123 0.022
17 121.6 3.06 74.5 5.32 0.115 0.075
18 107.0 2.98 94.6 3.69 0.228 0.224
19 65.4 0.62 47.0 3.00 0.308 0.032
20 71.0 0.01 54.6 3.87 0.399 0.244
21 81.2 5.12 90.1 3.31 0.170 0.165
22 128.3 3.89 95.2 4.25 0.180 0.142
23 135.0 4.73 80.1 3.79 0 0
24 98.9 1.86 68.7 2.99 0.077 0.028
25 66.7 7.41 62.3 3.10 0 0
Total 2,586.1 81.69 1,901.5 102.94
Notes.FIM= FinnishMark; = 5.94573FlM.
1EUR

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 Korhonen and Syrjinen: Resource
AllocationBasedon Efficiency
Analysis
1142 Management Science50(8),pp. 1134-1144,
C2004INFORMS

4
Figure fortheMostPreferred
Searching ValuesfortheOutputs (r = 0.01 xi). To guarantee managerial feasibility,
the changei=1
in inputs of each unit is limited to 10%
ParetoRace decrease (ai = -0.1xi) and 30% increase = 0.3x,).
(i-
Note that in this model, labor force and floor space
are varied in the same proportion. The output values
will change in the same proportionas well.
Goal 1 (max): Total Sales
Based on the specifications presented above, we
2665.35 assume that the chain management is willing to allo-
Goal 2 (max): Total Profit cate resources to the supermarkets as "efficiently" as
86.004 possible. The term "efficiently" means that the man-
agement tries to maximize the total sales and net
profit within the constraints specified above. Thus, the
reallocations of resources are allowed to some extent.
Bar: Accelerator F: Gears(B) F3: Fix num: Turn
F5: Brakes F2: Gears(F) F4: Relax FlO: Exit The MOLP model (4) is simple, and its size remains
reasonable even for many units, making it possible to
use an interactive MOLP approach to solve the model.
Thus, the inefficiency score of a unit cannot decrease.
We use Pareto Race (see Figure 4) to solve the
We also relax the assumption that a supermarket
could adjust its floor space in a short run. Labor force optimization problem in the first case. The current
is assumed to be adjustable. To solve the problem problem is quite simple, because it consists of two
based the assumptions above, we use model (7). objectives, Sales and Profit. The DM can search for
As in theoretical considerations, we adopt output- the most preferred trade-off for these objectives on
oriented approaches. The inefficiencies of all units the efficient frontier. When (s)he has found the final
produced by the output-oriented CRS and VRS mod- solution, (s)he has solved the allocation problem.
els are presented in Table 6. Relative changes in the input and output values of
In the first CRS model, the total sum of both inputs the units based on three alternative final solutions are
of all the units is allowed to increase by at most 1% presented in Table 7. The first solution corresponds to

Table7 Proportional BasedonAllocations

Changes for25Supermarkets
Model
2
1
Model
1
Solution Solution
2
Solution
1 Solution 3
2 Solution
Supermarket scaling scaling scaling Sales Profit Man-hours Sales Profit Man-hour:
i i ,i 8i AYl/Yli Ay2/Y2i AXli/Xli, Ay;/y, y2i Y2i AXli/Xli

1 -0.10 -0.10 -0.10 0.16 2.01 0.13 0.16 2.01 0.13

2 -0.10 -0.10 -0.10 0.09 -0.09 0.05 -0.03 0.27 -0.00
3 0.30 0.30 0.30 0 0 0 0 0 0
4 -0.10 0.30 -0.10 0.07 -0.18 -0.10 0.07 -0.18 -0.10
5 -0.10 -0.10 -0.10 0.35 0.70 0.26 0.39 0.89 0.30
6 -0.10 -0.10 -0.10 0.04 -0.23 -0.01 0.04 -0.23 -0.01
7 0.30 -0.10 0.30 0 0 0 -0.01 2.33 0.01
8 -0.10 -0.10 -0.10 0.26 -0.58 0.11 0.20 0.35 0.13
9 -0.10 -0.10 -0.10 0 0 0 0 0 0
10 0.30 0.30 0.30 0 0 0 0 0 0
11 -0.10 -0.10 -0.10 0 0 0 0 0 0
12 -0.10 -0.10 -0.10 0.00 1.08 -0.10 0.00 1.08 -0.10
13 -0.10 -0.10 -0.10 -0.08 0.74 -0.10 -0.08 0.74 -0.10
14 -0.10 -0.10 -0.10 -0.07 -0.92 -0.09 -0.17 -0.06 -0.10
15 -0.10 -0.10 -0.10 0.56 0.29 0.30 0.49 0.96 0.30
16 0.25 -0.10 -0.10 0.33 4.11 0.25 0.33 4.11 0.25
17 -0.10 -0.10 0.09 0.25 0.90 0.20 0.25 0.90 0.20
18 -0.10 -0.10 -0.10 0.00 0.26 -0.10 0.00 0.26 -0.10
19 -0.10 -0.10 -0.10 0.41 1.14 0.23 0.41 1.14 0.23
20 -0.10 -0.10 -0.10 0.40 542.82 0.30 0.37 641.24 0.30
21 -0.10 -0.05 -0.10 0.22 -0.31 -0.10 0.22 -0.31 -0.10
22 0.13 -0.10 0.02 0.00 0.21 -0.10 -0.00 0.21 -0.10
23 0.30 0.30 0.30 -0.08 -0.25 -0.10 -0.10 -0.11 -0.10
24 0.30 -0.10 0.30 -0.02 0.07 -0.10 -0.06 0.52 -0.10
25 -0.10 0.30 0.17 0.48 -0.78 -0.04 0.48 -0.78 -0.04

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Korhonen and Syrjinen: ResourceAllocationBasedon Efficiency
Analysis
ManagementScience50(8),pp. 1134-1144,C2004 INFORMS
Table8 intheTotalAmount
Changes ofInputs
andOutputs
Model1
Output/inputs Solution1 Solution2
Sales106 FIM(%) 85.6 (3.3) 55.5 (2.1)
Profit106FIM(%) 2.38(2.9) 7.77 (9.5)
Man-hours 103h (%) 19.0 (1.0) 19.0 (1.0)
Size103m2(%) 1.06(1.0) 0.53(0.5)
the strategy in which only additional sales are empha-
sized, the second one to a strategy with profit focus,
and the third one to a balanced strategy where an
optimal trade-off is sought. Table 8 presents the cor-
responding changes in the total amount of inputs and
outputs.
We notice that for most of the units the allocation
remains the same in all three solutions. The maxi-
mal amount of additional resources is allocated to the
efficient Supermarkets 3, 10, and 23 in all three solu-
tions of Model 1 in Table 7, and to the fourth effi-
cient Supermarket 25 only in Solution 2, where Profit
is emphasized. On the other hand, no inefficient unit
receives additional resources in all three solutions.
More resources are allocated to the inefficient Super-
market 4 when Profit is emphasized (Solution 2), and
the inefficient Supermarkets 7, 16, 22, and 24 perform
better when Sales is emphasized (Solution 1). Because
the maximal decrease is smaller than the maximal
increase, the number of the units that receive less
resources is larger than the number of the units that
receive more resources. Because the model is based on
a CRS production possibility set and the optimization
problem is linear, the solutions tend to be extreme.
In the second case, the Size of each unit is assumed
to be fixed during the planning period (a2i = [2i = 0).
Thus, we may drop the variables Ax2i from the
model. The total sum of Man-hours of all the units is
allowed to increase by at most 1%. To guarantee man-
agerial feasibility, the change in Man-hours of each
unit is limited to 10% decrease (a1i = -0.1x1i) and
30% increase (13i = Thus, in this case, the prob-
lem is basically to 0.3xli).
reallocate the labor force to the
units. If the number of the units is n, the number of
the variables of the model is O(rt2).Because the size of
the latter model with a large number of units makes
it unrealistic to use an interactive approach to that
problem, we use the original reference point method
(Wierzbicki 1980) for this problem.
Two alternative solutions are generated in Table 7.
The first solution corresponds to a strategy in which
additional sales are emphasized, and the second one
corresponds to a strategy with profit focus. The solu-
tions are based on aspiration levels 2,896 and 84.14 for
Sales and Profit in the first case, and 2,663 and 91.49
in the second case.
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1143
Model2
Solution3 Solution1 Solution2
79.3 (3.0) 257.4 (10.0) 228.5 (8.8)
4.31 (5.3) 7.75 (9.5) 14.59(17.9)
19.0 (1.0) 19.0 (1.0) 19.0 (1.0)
1.06(1.0) 0 (0) 0 (0)
As before, the allocation of many units remains the
same in both solutions. Some interesting observations
can be made. When Sales is emphasized (Solution 1),
some additional labor force (5%) is allocated to
the inefficient Supermarket 2. The supermarket is
assumed to increase Sales (9%), and to decrease Profit
(9%). If Profit is considered important (Solution 2),
Supermarket 2 does not get any additional labor force,
but Profit is assumed to increase (27%), while Sales
decreases (3%). Another interesting case is the effi-
cient Supermarket 7. When Sales is emphasized (Solu-
tion 1), there are no changes in the input and output
values, but when Profit is emphasized (Solution 2),
Profit increases (233%) and Sales decreases (1%). Some
additional resources (1%) are allocated.
The purpose of the examples was to demonstrate
various features of the support our approach provides
to the DM. It helps the DM to keep the problem in
his/her own hands, but on the other hand, it guar-
antees the solution to be efficient. The DM has the
possibility to search from a set of efficient solutions
that are specified by taking into account the assump-
tions concerning the production possibility set and
the transformation possibility sets.
5. Conclusion
In this paper, we have developed a general frame-
work for resource allocation. We consider a decision-
making environment in which a central unit controls
the resources of a set of units. We combine DEA and
MOLP to obtain a tool that provides the DM with a
possibility to incorporate preference information con-
cerning the relative importance of inputs and outputs
into the analysis.
DEA is used to characterize the production pos-
sibility set, which defines the production plans that
are feasible in general. The set is based on the
observed performance of the units under considera-
tion. The production possibility set is a well-known
concept in production economics. Second, we define
for each unit another set called the transformation
possibility set, which characterizes the possible short-
term changes for the unit. Each unit has its own
transformation possibility set that specifies feasible
changes for the unit within a certain time frame. The

Korhonen and Syrjinen: Resource
1144
transformation possibility set is a concept created in
this paper.
The resource-allocation problem is formulated as
a MOLP problem that usually has no unique solu-
tion. It depends on the DM's preferences and the
assumptions (s)he makes about the production pos-
sibility set and the transformation possibility sets. To
demonstrate the practical relevance of our approach,
we have illustrated its use with a numerical example
extracted from a real application.
In this paper, we have considered the MOLP
models where outputs are objectives and inputs are
constraints. It is also possible to use outputs as con-
straints and inputs as objectives, or to use outputs and
inputs as objectives simultaneously. We may apply
our approach to the cases where DM controls only a
part of the units. In the presented models, we have
further assumed that all units have a common pro-
duction possibility set. However, we may extend the
approach to the cases where the total set of units
consists of subsets with different production possibil-
ity sets.
All the models in this paper are linear, but the
approach can be extended to nonlinear and integer
models as well. A direction for further research might
be to study the problems where there are interdepen-
dencies between units.
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