Data Envelopment Analysis

Issue…..
 How to combine the several measures of
input and output into a single measure of
efficiency.

"data envelopment analysis".

 Data Envelopment Analysis
 Data Envelopment Analysis (DEA) is an application of

Linear Programming that is used to measure the relative

efficiency of operating units providing similar services.

 Multiple inputs and multiple outputs are taken into

consideration when estimating efficiency.

 DEA identifies the inefficient units that should be

targeted for further studies & if necessary corrective

actions.

 Application: Hospitals, banks, fast food outlets etc.

 THE DEA MODEL
O b je c tiv e F u n c tio n

u 1O 1e  u 2 O 2 e    u M O M
m ax E e  e
v 1 I 1e  v 2 I 2 e    v N I N e

C o n s tr a in ts

u 1O 1k  u 2 O 2 k    u M O M k
 1 .0 k  1 , 2 , , K
v 1I1k  v 2 I 2 k    v N I Nk

u j  0 j =1,2,…,M
vi  0
i= 1,2,…,N

Uj = measure of relative decrease in efficiency with each unit reduction in output

value. Wt assigned to each output
Vi = measure of relative increase in efficiency with each unit reduction in input
value. Wt assigned to each input
Note- Sum of input=1 ,the objective function will be in std.form
 DEA in Standard LP Form
STANDARD LP FORM scaling inputs to sum of 1.0)

max E e = u 1 O 1 e + u 2 O 2 e + × × × + u M O Me

SUBJECT TO:
v 1 I 1 e + v 2 I 2 e + × × × + v N I Ne = 1

u 1 O 1 k + u 2 O 2 k + L + u M O Mk - (v 1 I 1 k + v 2 I 2 k + L + v N I Nk )£ 0 k = 1, 2 , K , K

where:

uj ³ 0 j = 1, 2 , × × × , M
vi ³ 0 i = 1, 2 , × × × , N

RECOMMENDED SAMPLE SIZE: K ³ 2(N + M )

Graphical Illustration
 Consider seven DMUs which each have one input and
one output: L1 = (2,2), L2 = (3,5), L3 = (6,7), L4 = (9,8),
L5 = (5,3), L6 = (4,1), L7 = (10,7).

9
L4
8
L3 L7
7
6
L2
5
Output

4
L5
3
L1
2
L6
1
0
0 1 2 3 4 5 6 7 8 9 10 11
Input
Graphical Illustration
 DEA identifies the units in the comparison set which lie
at the top and to the left, as represented by L1, L2, L3,
and L4. These units are called the efficient units, and
the line connecting them is called the "envelopment
surface" because it envelops all the cases.  
 DMUs L5 through L7 are not on the envelopment
surface and thus are evaluated as inefficient by the
DEA analysis. There are two ways to explain their
weakness. One is to say that, for example, L5 could
perhaps produce as much output as it does, but with
less input (comparing with L1 and L2); the other is to
say it could produce more output with the same input
(comparing with L2 and L3).
Graphical Illustration
 Thus, there are two possible definitions of efficiency
depending on the purpose of the evaluation. One might
be interested in possible reduction of inputs (in DEA
this is called the input orientation) or augmentation of
outputs (the output orientation) in achieving technical
efficiency. Depending on the purpose of the evaluation,
the analysis provides different sets of peer groups to
which to compare.  
 However, there are times when reduction of inputs or
augmentation of outputs is not sufficient. In our
example, even when L6 reduces its input from 4 units
to 2, there is still a gap between it and its peer L1 in the
amount of one unit of output. In DEA, this is called the
"slack" which means excess input or missing output
that exists even after the proportional change in the
input or the outputs.
 Mid Atlantic Bus Lines

Bus Ticket sales Freight sales Labor hours Facility cost

Depot
1 700 300 40 500
2 300 600 50 500
3 200 700 50 400
4 400 600 50 500
5 500 400 40 400
6 500 500 50 500
7 800 500 40 600
8 300 200 30 400
 Mid Atlantic Bus Lines

Bus Ticket sales Freight sales Labor hours Facility cost

Depot
1 700 300 40 500
2 300 600 50 500
3 200 700 50 400
4 400 600 50 500
5 500 400 40 400
6 500 500 50 500
7 800 500 40 600
8 300 200 30 400
How to increase efficiency of bus
depot 6?

 Reduce labor by 0.106/0.00255 = 41.6hrs

 Reduce facility cost by 0.106/0.001745 = 60.70 unit
 Compos D6 Excess
Outputs ite Inputs
and Reference Set Referen Used
Inputs ce Unit
Depot 3 Depot 5 Depot 7

Tickets (.21)200 + (.74)500 + (.11)800 = 500 500 –

Freight (.21)700 + (.74)400 + (.11)500 = 500 500 –

Labor (.21) 50 + (.74) 40 + (.11) 40 = 44.5 50 5.5

Facility (.21)400 + (.74)400 + (.11)600 = 446 500 54.0

Definitions?
 Reduced Cost?
Amount by which the objective function
coefficient has to change [increase for
maximization, decrease for minimization]
before that decision variable attains a positive
value in the optimal solution
 Dual Price?
How much the objective function will change if
there is one unit increase in RHS of a constraint
Disadvantage of DEA in Mid Atlantic case
 Assumes all units comparable, but a depot
can be a starting point/ terminal and other
just intermediate point.
 Assumes depots as independent units with
similar work.
Strengths & Weaknesses of DEA

 Strengths

DEA can handle multiple inputs and multiple outputs

Comparisons are directly against peers
 Inputs and outputs can have very different units

 Weaknesses

Measurement error can cause significant problems
 DEA does not measure"absolute" efficiency


Statistical tests are not applicable
 Large problems can be computationally intensive
The End