www.deazone.

com
http://www.opensourcedea.org/index.php?title=Open_Source_DEA
http://www.opensourcedea.org/index.php?title=DEA
http://deazone.com/en/software/software-pim3

DEA - A brief introduction

Data Envelopment Analysis is a state of the art benchmarking technique which is particularly
useful for multi-criteria benchmarking studies. In DEA, the productivity of a unit is evaluated
by comparing the amount of output(s) produced in comparison to the amount of input(s)
used. The performance of a unit is calculated by comparing its efficiency with the best
observed performance in the data set. There exist many different DEA models, each with its
own characteristics. This page will however concentrate on the main concepts of DEA.

A bit of history
Early performance measurement used to principally focus on financial output performance
disregarding other areas (such as production or customer service) or ignoring the concept of
efficiency. The consequences of this omission prompted econometricians to rethink how
conventional econometric analysis looked at production functions and how it dealt with
variations in efficiency

[1]

Production functions, which model the structure of production, have been developed and
refined over more than 80 years (e.g. by Cobb and Douglas
Knox Lovell

[3]

[2]

). However, Kumbhakar and

point out that while conventional econometrics tends to use production, cost,

and profit functions, they assume that producers allocate inputs and outputs efficiently and
that producers operate on these functions apart from randomly distributed statistical noise.
The authors state anecdotal evidence (p. 2) which suggests that producers are not always
successful in solving their optimisation problems efficiently. This can be illustrated by
inefficiently utilising the resources (inputs) in the production process (this is called technical
inefficiency (Cooper et al., 2007)), or by poorly allocating resources and production targets

(this is called mix inefficiency

[4]

. Producers not solving their optimisation problem correctly

were consequently not operating on the production functions used, up to then, to measure
performance.

In the light of the clear limitations of traditional production functions, productivity analysis
focus

moved

towards

development
Koopmans

[5]

of

production

frontier

analysis

frontiers.
methods

The

literature

began

in

that

the

directly

1950s

with

influenced
the

work

the
of

who mentioned that a producer would be efficient if, and only if, it is impossible

to produce more of any output without producing less of some other output or using more of
some
(1953

input.
[7]

Koopmans

cited in

[8]

original

work

prompted

Debreu

in

1951

[6]

and

Shephard

) to develop models which associated the distance function with technical

efficiency. This work was critical to the development of further literature on efficiency. Farrell
(1957)

[9]

applied for the first time these developments to measure technical efficiency in an

agricultural context. This innovative work influenced the creation of two major frontier
analysis techniques: Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA).
The concept of efficient frontier is illustrated in the figure below for a one input, one output
case. The best performers are on the frontier line (in this case the best performer is E).

Farrells paper (1957) which did not correctly address mix inefficiencies [10] prompted
Charnes, Cooper and Rhode (CCR, 1978 [11] ) to develop another frontier analysis method called
Data Envelopment Analysis (DEA). DEA is a non-parametric benchmarking method (i.e. which

does not use statistical distribution) which measures productivity by considering a system of
inputs and outputs. Since this paper, many different Data Envelopment Analysis models have
been introduced (e.g. BCC, SBM, ADD or FDH

[12]

, some being drastically different from this

original model and DEA has become a well established performance measurement technique.

Efficiency ratio
Efficiency is the ratio between the outputs produced with the amount of inputs used. The
'volume of sales per employee', the 'GDP per capita', or the 'average number of passenger per
flight' are common example of efficiency ratio. DEA measures the efficiency of a unit (called
Decision Making Units or DMU) using a weighted ration as illustrated below:

The ratio above accounts for all outputs and inputs. This type of measure is called Total
Productivity Factor. All DEA models implement similar type of performance ratios although with
their own specific characteristics. The weights assigned to each input and each output are
variables used in the DEA optimisation process.

Efficient frontier
The efficient frontier represents the best observed performance in the data set. The concept is
best explained with a simple example. Let's consider the following table showing number of
employees and sales figures for some food stores. The efficiency ratio (sales / employee) can
be used to measure the efficiency of the different stores The table is as follows:

Plotting this data with employees on the x axis (the horizontal axis), and the sales on the y
axis (the vertical axis) will give the following graph:

The table and graph allows to find the best performers. In this case, store E shows the best
performance with an efficiency of 1. The line that spans from the origin to store E is the
efficiency frontier. The efficiency frontier illustrates the best observed performance and is said
in mathematics to 'envelop' the data; hence DEA's name. The region enveloped by the
efficient frontier is called the Production Possibility Set. This is the region of possible
production (based on the observed best performance).

In DEA, the performance of a DMU is always calculated by comparing it to the efficiency

frontier directly determined from the data.

Becoming efficient
All the DMU that are not on the efficiency frontier are inefficient (a DMU on the efficiency
frontier is not necessarily efficient but this point is discussed here with DMU H situation). An
inefficient unit must consequently reach the efficiency frontier in order to become efficient.
There are three possibilities:

Reduce the inputs while keeping the outputs constant (this is an input oriented
approach),

Increase the outputs while keeping the inputs constant (this is an output orientated
approach).

Both increasing outputs while reducing the inputs (this can be done with non-oriented
versions of models such as the SBM model).

In effect, the further away from the frontier an entity is, the worse its performance.

This can be illustrated by considering DMUC from the previous graph:

This illustration shows how DMUC can either reach the frontier by reducing its inputs (whilst
keeping its output levels constant) and reach 'P', or by increasing its output (whilst keeping
its input levels constant) and reach Q.

Returns to scale
It is important to note that the frontier pictures in the graphs above is assumed to stretch to
infinity; i.e. that the performance levels of DMU E (the only efficient store) are possible
regardless of the number of employee the store has. This is called Constant returns to scale
(Constant RTS). Although the constant RTS assumption is sometimes true for a local range of
production, it sometimes need to be relaxed. This is possible with - for example - variable
returns to scale which are illustrated in the graph below:

Note that under variable returns to scale, DMU B becomes efficient.

Although DMU H is on the efficiency frontier, it is not efficient. This is caused by DMUE which
produces a similar amount of 'sales' (i.e. 5) but uses 3 less units of 'employees' to do so. In
order for H to be efficient, it will need to reduce its sales force by 3 employees in order to
reach E's coordinates. DMUH could also become efficient by increasing its sales. However
there is no way to know for sure if this is possible as such production levels have not been
observed (i.e. above the current efficiency frontier).

There exist other types of Returns to Scale such as Increasing Returns To Scale (sometimes
also called Non Decreasing Returns To Scale, e.g. by Seiford and Zhu [13] ) which assume that it
is not possible to reduce the scale of DMU but that RTS can strech to infinity. Another type of
RTS which is the he opposite assumption to IRTS is the Decreasing Returns To Scale (also
sometimes called non-increasing RTS). Finally, there is a General RTS model that allows to
control how much the scale of DMU can be reduced or increased.

Technical & Mix Inefficiencies

There exist two types of inefficiency:

Technical inefficiency

Mix inefficiencies

The difference between the two can be best explained with a simple example. The following
graph illustrates the performance of different vehicles depots based on 2 outputs: utilisation
and sales, and one input: number of vehicles. It is possible to illustrate the performance of
each depot by plotting the utilisation/vehicle and the sales/vehicle ratio values. This is
illustrated below:

On this graph, DMU C is not efficient as it is not on the efficiency frontier (see Becoming
efficient above). In order for DMU C to become efficient, it needs to reach the frontier by
projecting on to Q. This radial projection corresponds to the technical inefficiency of DMU C.
DMU A is also not efficient as not on the efficient frontier. However, when projecting on the
efficient frontier to R (technical inefficiencies), DMU A is still not efficient as there exist
another DMU (DMU B) which illustrates proportionally greater sales output per vehicles. In
order for DMU A to become efficient, it first needs to project on to the efficiency frontier and
then increase it sales per vehicle output until it reaches B (mix inefficiencies). The amount of
improvement between Q and B is measured by the non-negative slack of A on its sales
performance.

Technical inefficiencies can thus be eliminated without changing the proportions between
inputs and outputs while mix inefficiencies can only be eliminated by changing the proportion
(mix) between inputs and outputs. DEA models have different approaches as to how the

technical and mix inefficiencies are evaluated. DMUs are efficient when they exhibit no
technical inefficiencies and no mix inefficiencies.

Reference Set / Peers

In the graph above, Q, the projections of DMU C on the efficient frontier, is between DMU F
and DMU G. DMU F and DMU G are called the Reference Set of DMU C. The reference set of a
given DMU consists of the list of efficient DMUs which performance was used to calculate the
efficiency of the given DMU.

How does DEA work?

As explained earlier, DEA uses a total factor productivity ratio to measure performance (i.e. a
unique ratio with all the inputs and outputs). DEA attributes a virtual weight tp each of these
input and output.

Entities' performance is then calculated using a linear optimisation process which tries to
maximise each entity's ratio by finding the best set of weight for this particular entity.

The optimisation process is contrained by existing data so that each entity is compared
against the best observed performance.

This simple example should have introduced most of DEA's basic concepts. Although the
example only used a single input and a single output, DEA is more useful when performance
needs to take multiple inputs and outputs into account. More information specific to different
DEA models (e.g. CCR, BCC, SBM) will be made available on this site correspondingly to the
library releases.

References

1. Kumbhakar Subal C., Lovell Knox, Stochastic Frontier Analysis, Cambridge University
Press, 2000, p. 1

2. Cobb C.W., Douglas, P.H., A Theory of Production, American Economic Review, Vol. 18
(Supplement), pp. 139-165

3. Kumbhakar Subal C., Lovell, Knox, Stochastic Frontier Analysis, Cambridge University
Press, 2000, p. 1

4. Cooper William W., Seiford Lawrence M., Tone Karou Data Envelopment Analysis - A
Comprehensive Text with Models, Applications References and DEA-Solver Software .
Second Edition, Springer, 2007

5. Koopmans Tjalling, C., Activity Analysis of Production and Allocation, Activity Analysis of
Production and Allocation Conference, John Wiley & Sons Inc - Chapman & Hall, 1951

6. Debreu G., The Coefficient of Resource Utilization, The Econometric Society, 1951, Vol.
19, Issue 3, pp. 273-292

7. Shepard R.W., Cost and Production Functions, Princeton University Press, 1953

8. Kumbhakar Subal C., Lovell, Knox, Stochastic Frontier Analysis, Cambridge University
Press, 2000, p. 7

9. Farrell M.J., The Measurement of Productive Efficiency, Journal of the Royal Statistical
Society. Series A (General), Blackwell Publishing for the Royal Statistical Society, Vol.120,
Issue 3, pp. 253-290

10. Cooper, William W.; Seiford, Lawrence M.; Tone Karou Data Envelopment Analysis - A
Comprehensive Text with Models, Applications References and DEA-Solver Software .
Second Edition, Springer, 2007, pp. 46-47

11. Charnes, A.; Cooper, W.W.; Rhodes, E. Measuring the efficiency of decision making units .
European Journal of Operational Research, 1978, Vol. 2, p. 429.

12. Cooper, William W.; Seiford, Lawrence M.; Tone Karou Data Envelopment Analysis - A
Comprehensive Text with Models, Applications References and DEA-Solver Software .
Second Edition, Springer, 2007

13. Seiford L.M., Zhu J., An investigation of returns to scale in data envelopment analysis ,
International Journal of Management Science, Vol. 27, 1999, pp. 1-11

External Links
This section lists a few links to different web sites of potential interest. The order in which the
sites are listed does not reflect any preference of any kind.

Further Information
Further information on DEA can be found at the following links:

Wikipedia DEA web page .

The deazone web site.

The OR-Notes web page from J. E. Beasley.

The DEA Online Software web site.

Some DEA software

Here is a list of some DEA software:

The Performance Improvement Management software (PIM) developped under the

supervision of Prof. Emmanual Thanassoulis and of Dr Ali Emrouznejad.

The Banxia software.

A software written by Prof. Tim Coelli called CEPA .

The Efficiency Measurement System software developed by Holger Scheel (the software
documentation can be found here ).

The web based DSS Lab DEA project from university of Piraeus DSS Lab DEA Software .

Further reading on DEA software can be found in this paper from Richard S. Barr.

Some other open source DEA projects

Finally here are two other open source DEA projects:

The OpenDEA project from sourceforge.

The jDEA project from sourceforge.

Features
Number of DMUs
Basic models

Advanced models
Number of combinations of Models

MaxDEA MaxDEA
Basic
Pro
Not
Not limited
limited

All combinations of basic options,

including

Yes

Yes

Radial (CCR, BCC)

Yes

Yes

Nonradial (SBM)

Yes

Yes

CRS, VRS, NIRS, NDRS, GRS

Yes

Yes

Cost, Revenue, Profit

Yes

Yes

Yes

Yes

No

Yes

200+

30,000+

Input-, output-, non-orientation and

generalized orientation
All possible combinations of
advanced options