DATA ENVELOPMENT ANALYSIS

DATA ENVELOPMENT ANALYSIS (DEA)

A methodology based upon an interesting

application of linear programming
Originally developed for assessing the relative
performance of a set of firms (decision making
units DMU) that use a variety of identical
inputs to produce a variety of identical
outputs.
Basic ideas from Farrell (1957)
Charnes, Cooper and Rhodes (1978)
Introductory books - Norman and Stoker
(1991), and Ramanathan (2003). Also, Cooper,
Seiford and Tone (2007).
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BASIC CONCEPTS

Output
Efficiency
Input
Firm Input: Output:
Capital Employed Value added
(CAP) (VA)
($ millions) ($ millions)
A 8.6 1.8
B 2.2 0.2
C 15.6 2.8
D 31.6 4.1
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BASIC CONCEPTS

Output
Efficiency
Input
Firm Input: Output: Efficiency:
Capital Employed Value added Value added
(CAP) (VA) per capital
($ millions) ($ millions) employed
A 8.6 1.8 0.209
B 2.2 0.2 0.091
C 15.6 2.8 0.179
D 31.6 4.1 0.130
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BASIC CONCEPTS

Output
Efficiency
Input
Firm Input: Output: Efficiency: Relative
Capital Employed Value added Value added Efficiency
(CAP) (VA) per capital )%(
($ millions) ($ millions) employed
A 8.6 1.8 0.209 100
B 2.2 0.2 0.091 43.4
C 15.6 2.8 0.179 85.8
D 31.6 4.1 0.130 62.0
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BASIC CONCEPTS

Output
Efficiency
Input
Firm Input: Output: Efficiency: Relative
Capital Employed Value added Value added Efficiency
(CAP) (VA) per capital )%(
($ millions) ($ millions) employed
A 8.6 1.8 0.209 100
B 2.2 0.2 0.091 43.4
C 15.6 2.8 0.179 85.8
D 31.6 4.1 0.130 62.0
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100(.091/.209)
SINGLE OUTPUT AND TWO INPUTS
Firm Input 1: Input 2: Output:
CAP No. of Employees (EMP) (000) VA
A 8.6 1.8 1.8
B 2.2 1.7 0.2
C 15.6 2.6 2.8
D 31.6 12.3 4.1

Firm VA/ CAP VA/ EMP

A 0.2093 1.0000
B 0.0909 0.1176
C 0.1795 1.0769
D 0.1297 0.3333
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FRONTIER ANALYSIS IN DEA

F (0.0909, 1.0769)

Efficiency Frontier

Efficiency
Frontier
E (0.2093, 0.2709)

G (0.2093, 0.1176)

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MATHEMATICAL FORMULATION: USE
OF WEIGHTS OF INPUTS AND OUTPUTS

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MATHEMATICAL PROGRAMMING ASPECTS
OF DEA

I xi is the i th input
Virtual Input u i x i
i 1
ui is its weight
I is the number of inputs

J
yj is the j th output
Virtual Output v j y j vj is its weight
j 1
J is the number of outputs
J

Virtual Output

j
v jy j
1
Efficiency I
Virtual Input

i
ui x i
1
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MATHEMATICAL PROGRAMMING ASPECTS
OF DEA

J
v jm y jm
j 1
For m th Efficiency
I
DMU, u im x im
i 1

In DEA, Efficiency of m th DMU is maximized subject

to the condition that efficiencies of other DMUs using
the same weights is restricted to be between 0 and
1.

Let there be N decision-making units.

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 FRACTIONAL DEA PROGRAM

J Em is the efficiency of the m th DMU,

v jm y jm yjm is j th output of the m th DMU,
j 1
max E m vjm is the weight of that output,
I
u im x im xim is i th input of the m th DMU,
i 1
uim is the weight of that input, and
subject to
yjn and xin are j th output and i th input
J
v jm y jn of the n th DMU
j 1
0 1 ; n 1,2, , N
I
u im x in
i 1
v jm , u im 0; i 1,2, , I ; j 1,2, , J
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FRACTIONAL DEA PROGRAM FOR THE
EFFICIENCY OF FIRM A
If the efficiency is unity,
1.8vVA , A
then the firm is said to be
max E A
8.6uCAP, A 1.8u EMP , A efficient, and will lie on
subject to the frontier.
0 EA
1.8vVA , A
1 Otherwise, the firm is said
8.6uCAP, A 1.8u EMP , A
to be relatively inefficient.
0.2vVA , A
0 EB
2.2uCAP, A 1.7u EMP , A
1 Use the program to get
2.8vVA , A the efficiency of only one
0 EC 1
15.6uCAP, A 2.6u EMP , A firm (the reference firm
0 ED
4.1vVA , A
1
Firm A here).
31.6uCAP, A 12.3u EMP , A
vVA , A , uCAP, A , u EMP , A 0
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FRACTIONAL DEA PROGRAM FOR THE
EFFICIENCY OF FIRM B
0.2vVA ,B
max E B
To get the efficiency 2.2uC A P,B 1.7u EMP ,B
scores of other firms, subject to
more such 0 EA
1.8vVA ,B
1
8.6u C A P,B 1.8u EMP ,B
mathematical
0.2vVA ,B
programs have to be 0 EB 1
2.2u C A P,B 1.7u EMP ,B
solved, keeping each
2.8vVA ,B
of them as the 0 EC
15.6u C A P,B 2.6u EMP ,B
1

reference firm. 4.1vVA ,B

0 ED 1
31.6u C A P,B 12.3u EMP ,B
vVA ,B , uC A P,B , u EMP ,B 0

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CONVERTING FRACTIONAL DEA PROGRAM
INTO LP FORMAT

Output maximization DEA program

Normalize the denominator by
forcing it to be equal to one, and
maximize virtual output.
Input minimization DEA program
Normalize the numerator by forcing
it to be equal to one, and minimize
virtual input. 15
 OUTPUT MAXIMIZATION DEA PROGRAM
FOR FIRM A

1.8vVA , A
max E A max 1.8vVA , A
8.6uCAP, A 1.8u EMP , A
subject to subject to
1.8vVA , A 8.6uCAP, A 1.8u EMP , A 1
0 EA 1
8.6uCAP, A 1.8u EMP , A
1.8vVA , A 8.6uCAP, A 1.8u EMP , A 0
02..28vvVA,A 152.2.u6uCAP,A 1.27.u6uEMP ,A 00
0.2vVA , A
0 EB 1
2.2uCAP, A 1.7u EMP , A
2.8vVA , A VA , A CAP, A EMP , A
4.1vVA , A 31.6uCAP, A 12.3u EMP , A 0
0 EC 1
15.6uCAP, A 2.6u EMP , A
4.1vVA , A vVA , A , uCAP, A , u EMP , A 0
0 ED 1
31.6uCAP, A 12.3u EMP , A
vVA , A , uCAP, A , u EMP , A 0
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 DEA RESULTS FOR THE FOUR FIRMS

If the DEA models for Firms A, B, C and D are

solved using LINDO or any other LP software,
we get the following efficiency values.
Efficiency of Firm A: 1 or 100%
Efficiency of Firm B: 0.434 or 43.4%
Efficiency of Firm C: 1 or 100%
Efficiency of Firm D: 0.62 or 62%

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POSITIVITY RESTRICTIONS

Positivity J

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y jm
restrictions on max Em
j 1
jm

decision
I

u im imx
variables
i 1

subject to
J
v jm y jn
j 1
0 I
1; n 1,2, , N
uim xin
i 1

v jm , uim ; i 1,2, , I ; j 1,2, , J

 DUAL DEA MODELS (WITHOUT
RESTRICTIONS)

Primal Dual

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max 1.8vVA , A
min A
subject to
such that
8.6uCAP, A 1.8u EMP , A 1
1.8 AA 0.2 BA 2.8CA 4.1DA 1.8

1.8vVA , A 8.6uCAP, A 1.8u EMP , A 0

8.6 A 8.6 AA 2.2BA 15.6 CA 31.6 DA 0
0.2vVA , A 2.2uCAP, A 1.7u EMP , A 0
1.8 A 1.8 AA 1.7 BA 2.6 CA 12.3DA 0
2.8vVA , A 15.6uCAP, A 2.6u EMP , A 0
4.1vVA , A 31.6uCAP, A 12.3u EMP , A 0
AA,BA ,CA,DA 0
vVA , A , uCAP, A , u EMP , A 0 A unrestricted

Dual is computationally more efficient

VERSIONS OF DEA MODELS

The primal version is normally called as

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Multiplier version, while the dual is called as
Envelopment version.
The DEA models so far are called as CCR
(Charnes, Cooper and Rhodes) DEA Models.
RETURNS TO SCALE AND DEA MODELS

Returns to Scale

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Constant, Increasing and Decreasing

Variable returns to scale (VRS) can be incorporated in

Envelopment versions by appending the constraint,
N
n 1
n 1
CCR models, modified for returns to scale, are called
BCC (Banker, Charnes and Cooper) DEA Models.
CRS AND VRS EFFICIENCIES

Efficiency scores calculated using CCR and BCC models

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will be different.
For the same set of data, for a base DMU,

Efficiency score calculated Efficiency score calculated

using CCR model using BCC model
or
CRS efficiency VRS efficiency
Technical and Scale Efficiencies
Technical efficiency describes the efficiency in converting
inputs to outputs.

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Scale efficiency recognizes that economy of scale cannot
be attained at all scales of production, and that there is
one most productive scale size, where the scale efficiency
is maximum at 100%.
CRS efficiency comprises both technical and scale
efficiencies.
VRS efficiency measures pure technical efficiency.
Its CRS efficiency
Scale efficiency of a DMU
Its VRS efficiency