Data envelopment analysis

Data envelopment analysis (DEA) is a nonparametric method in operations research and economics
for the estimation of production frontiers.[1] DEA has been applied in a large range of fields including
international banking, economic sustainability, police department operations, and logistical
applications[2][3][4] Additionally, DEA has been used to assess the performance of natural language
processing models, and it has found other applications within machine learning.[5][6][7]

Description

DEA is used to empirically measure productive efficiency of decision-making units (DMUs). Although
DEA has a strong link to production theory in economics, the method is also used for benchmarking
in operations management, whereby a set of measures is selected to benchmark the performance of
manufacturing and service operations.[8] In benchmarking, the efficient DMUs, as defined by DEA,
may not necessarily form a “production frontier”, but rather lead to a “best-practice
frontier.”[1][9]: 243–285

In contrast to parametric methods that require the ex-ante specification of a production- or cost-
function, non-parametric approaches compare feasible input and output combinations based on the
available data only.[10] DEA, one of the most commonly used non-parametric methods, owes its name
to its enveloping property of the dataset's efficient DMUs, where the empirically observed, most
efficient DMUs constitute the production frontier against which all DMUs are compared. DEA's
popularity stems from its relative lack of assumptions, the ability to benchmark multi-dimensional
inputs and outputs as well as its computational ease owing to it being expressable as a linear
program, despite its task to calculate efficiency ratios.[11]

History

Building on the ideas of Farrell,[12] the 1978 work "Measuring the efficiency of decision-making units"
by Charnes, Cooper & Rhodes[1] applied linear programming to estimate, for the first time, an
empirical, production-technology frontier. In Germany, the procedure had earlier been used to
estimate the marginal productivity of R&D and other factors of production. Since then, there have
been a large number of books and journal articles written on DEA or about applying DEA to various
sets of problems.

Starting with the CCR model, named after Charnes, Cooper, and Rhodes,[1] many extensions to DEA
have been proposed in the literature. They range from adapting implicit model assumptions such as
input and output orientation, distinguishing technical and allocative efficiency,[13] adding limited
disposability[14] of inputs/outputs or varying returns-to-scale[15] to techniques that utilize DEA results
and extend them for more sophisticated analyses, such as stochastic DEA[16] or cross-efficiency
analysis.[17]

Techniques

In a one-input, one-output scenario, efficiency is merely the ratio of output over input that can be
produced, while comparing several entities/DMUs based on it is trivial. However, when adding more
inputs or outputs the efficiency computation becomes more complex. Charnes, Cooper, and Rhodes
(1978)[1] in their basic DEA model (the CCR) define the objective function to find efficiency

as:

where the known outputs are multiplied by their respective weights

and divided by the inputs multiplied by their respective weights

The efficiency score is sought to be maximized, under the constraints that using those weights on
each , no efficiency score exceeds one:

and all inputs, outputs and weights have to be non-negative. To allow for linear optimization, one
typically constrains either the sum of outputs or the sum of inputs to equal a fixed value (typically 1.
See later for an example).

Because this optimization problem's dimensionality is equal to the sum of its inputs and outputs,
selecting the smallest number of inputs/outputs that collectively, accurately capture the process one
attempts to characterize is crucial. And because the production frontier envelopment is done
empirically, several guidelines exist on the minimum required number of DMUs for good
discriminatory power of the analysis, given homogeneity of the sample. This minimum number of
DMUs varies between twice the sum of inputs and outputs ( ) and twice the product of
inputs and outputs ( ).

Some advantages of the DEA approach are:

no need to explicitly specify a mathematical form for the production function

capable of handling multiple inputs and outputs

capable of being used with any input-output measurement, although ordinal variables remain tricky

the sources of inefficiency can be analysed and quantified for every evaluated unit

using the dual of the optimization problem identifies which DMU is evaluating itself against which
other DMUs

Some of the disadvantages of DEA are:

results are sensitive to the selection of inputs and outputs

high-efficiency values can be obtained by being truly efficient or having a niche combination of
inputs/outputs

the number of efficient firms on the frontier increases with the number of inputs and output
variables

a DMU's efficiency scores may be obtained by using non-unique combinations of weights on the
input and/or output factors

Example

Assume that we have the following data:

Unit 1 produces 100 items per day, and the inputs per item are 10 dollars for materials and 2
labour-hours

Unit 2 produces 80 items per day, and the inputs are 8 dollars for materials and 4 labour-hours

Unit 3 produces 120 items per day, and the inputs are 12 dollars for materials and 1.5 labour-hours

To calculate the efficiency of unit 1, we define the objective function (OF) as

which is subject to (ST) all efficiency of other units (efficiency cannot be larger than 1):

Efficiency of unit 1:

Efficiency of unit 2:
 Efficiency of unit 3:

and non-negativity:

A fraction with decision variables in the numerator and denominator is nonlinear. Since we are using
a linear programming technique, we need to linearize the formulation, such that the denominator of
the objective function is constant (in this case 1), then maximize the numerator.

The new formulation would be:

OF

ST
Efficiency of unit 1:

Efficiency of unit 2:

Efficiency of unit 3:

Denominator of nonlinear OF:

Non-negativity:

Extensions

A desire to improve upon DEA by reducing its disadvantages or strengthening its advantages has
been a major cause for discoveries in the recent literature. The currently most often DEA-based
method to obtain unique efficiency rankings is called "cross-efficiency." Originally developed by
Sexton et al. in 1986,[17] it found widespread application ever since Doyle and Green's 1994
publication.[18] Cross-efficiency is based on the original DEA results, but implements a secondary
objective where each DMU peer-appraises all other DMU's with its own factor weights. The average of
these peer-appraisal scores is then used to calculate a DMU's cross-efficiency score. This approach
avoids DEA's disadvantages of having multiple efficient DMUs and potentially non-unique weights.[19]
Another approach to remedy some of DEA's drawbacks is Stochastic DEA,[16] which synthesizes DEA
and Stochastic Frontier Analysis (SFA).[20]

Footnotes

1. Charnes et al (1978)

2. Charnes et al (1995)
 3. Emrouznejad et al (2016)

4. Thanassoulis (1995)

5. Koronakos and Sotiropoulos (2020)

6. Zhou et al (2022)

7. Guerrero et al (2022)

8. Mahmoudi et al (2021)

9. Sickles et al (2019)

10. Cooper et al (2007)

11. Cooper et al (2011)

12. Farrell (1957)

13. Fried et al (2008)

14. Cooper et al (2000)

15. Banker et al (1984)

16. Olesen (2016)

17. Sexton (1986)

18. Doyle (1994)

19. Dyson (2001)

20. Olesen et al (2016)

References

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Mahmoudi, Amin; Abbasi, Mehdi; Deng, Xiaopeng (2021). "Evaluating the Performance of the
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envelopment analysis". European Journal of Operational Research. 87 (3): 641–657.
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Zhou, Zachary; Zachariah, Alisha; Conathan, Devin; Kline, Jeffery (2022). "Assessing Resource-
Performance Trade-off of Natural Language Models using Data Envelopment Analysis".
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parametric Performance Assessment". 2020 11th International Conference on Information,
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Further reading

Sun, Shinn (2002). "Measuring the relative efficiency of police precincts using data envelopment
analysis" (https://www.researchgate.net/publication/4934554) . Socio-Economic Planning
Sciences. 36 (1): 51–71. doi:10.1016/s0038-0121(01)00010-6 (https://doi.org/10.1016%2Fs0038-0
121%2801%2900010-6) . Retrieved 27 January 2022.

Tofallis, Chris (2001). "Combining two approaches to efficiency assessment" (https://papers.ssrn.c

External links

Data Envelopment Analysis (https://www.dataenvelopment.com) official website

Journal of Productivity Analysis (https://www.springer.com/journal/11123) official website