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# Data Envelopment Analysis (DEA)

T.V.Subramanian

## Which Unit is most productive?

DMU labor hrs. #cust. 1 100 150 2 75 140 3 120 160 4 100 140 5 40 50

## DEA (Charnes, Coopers & Rhodes 78)

A multiple-input, multiple-output productivity measurement tool Basic intuition (DMU = decision making unit) #cust.
DMU labor hrs. #cust. #cust/hr. 1 100 150 1.50 2 75 140 1.87 3 120 160 1.33 4 100 140 1.40 5 40 50 1.25

200
x x x

100
x

50

100

labor hrs.

## Extending to multiple outputs ...

Ex: Consider 8 M.D.s working at Shouldice Hospital for the same 160 hrs. in a month. Each performs exams and surgeries. Which ones are most productive?
Doctor #Exams #Surgeries 1 48 68 2 12 80 3 35 76 4 31 71 5 20 70 6 20 105 7 36 53 8 15 65

Note: There is some efficient trade-off between the number of surgeries and exams that any one M.D. can do in a month, but what is it?

## Scatter plot of outputs:

120 100 #Surgeries 80 60 40 20 0 0 10 20 30 #Exams

Efficient M.D.s: These two M.D.s (#1 and #6) define the most efficient trade-off between the two outputs.

#6

#1

## These points are dominated by #1 and #6.

40 50 60

Pareto-Koopman efficiency along the frontier - cannot increase an output (or decrease an input) without compensating decrease in other outputs (or increase in other inputs).

How bad are the inefficient M.D.s and where are the gaps?
120 100 #Surgeries 80 60 40 20 0 0 10 20 30 #Exams 40 50 60

#5

## Efficiency score = 73.4%

Nearest efficient points define a reference set and a linear combination of the reference set inputs and outputs defines a hypothetical composite unit (HCU)
120 100 #Surgeries 80 60 40 20 0 0 10 20 30 #Exams 40 50 60

#6

#5 #1

HCU

## DEA summary so far:

DEA uses an efficient frontier to define multiple I/O productivity
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 

Frontier defines the (observed) efficient trade-off among inputs and outputs within a set of DMUs. Relative distance to the frontier defines efficiency Nearest point on frontier defines an efficient comparison unit (hypothetical comparison unit (HCU)) Differences in inputs and output between DMU and HCU define productivity gaps (improvement potential)

## How do we do this analysis systematically?

Productivity
Conceptually ... Productivity = Outputs Inputs Reality if more complex ... Inputs
equipment facility space server labor mgmt. labor

Outputs
#type A cust.

## Operating Units Differ

    

Mix of customers served Availability and cost of inputs Facility configuration Processes/practices used Examples

bank branches, retail stores, clinics, schools, etc. How do we compare productivity of a diverse set of operating units serving a diverse set of markets? What are the best practice and under-performing units? What are the trade-offs among inputs and outputs? Where are the improvement opportunities and how big are they?

Questions:

Some approaches
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Operating ratios

e.g. Labor-hrs/transaction, \$sales/sq.-ft. Good for highly standardized operations Problem: Does not reflect varying mix of inputs and outputs found in more diverse operations

## Financial approach: Convert everything to \$\$\$!

\$Inputs \$Outputs

Problems?

Some inputs/outputs cannot be valued in \$ (non-profit) Profitability is not the same as operating efficiency (e.g. variances in margins and local costs matter as well)

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## Profitability is a function of 3 elements

Input prices (costs) Output prices Technical efficiency (How much input is required to generate the firms output.)

Improving operations requires understanding technical efficiency not just overall profitability.

## Structure of DEA Models

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Efficiency = Outputs/Inputs Efficiency rating from 0 (worst) to 1 (best) Maximize Outputs/Inputs of a specific service unit Subject to: Outputs/Inputs e 1 for every service unit No a priori weighting of outputs or inputs assumed

Chapter 17 Data Envelopment Analysis Operations Management, 2006, Thomson Successful Service

13

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Linear model

## constants: outputs, inputs variables: output weights, input weights

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Analyze units one at a time Maximize Outputsi x Output weight (specific unit j) subject to:

[(outputsi x output weight)/(inputsi x input weight) e 1] or (outputsi x output weight) (inputsi x input weight) e0 For all other units: Chapter 17 Data Envelopment Analysis input weight =2006, Thomson Successful Service Operations Management, 1 for specific unit j14 Inputsj x

LP Formulation:
Data

K N M O jk I ik vi uj Ek

# operting units (DMUs) k ! 1,..., K # inputs i ! 1,..., N # outputs j ! 1,..., M observed level of output j from DMU k observed level of input i from DMU k weight on input i weight on output j efficiency of DMU (0 - 100%)
M

Model variables

u O
j

jk

Ek !

j !1 N

v I
i !1

i ik

max Ee

## s.t. Ek e 100, k ! 1,..., K

Which can be formulated
M

max u j O je
j !1

s.t.
N

v I
i !1 M j j !1

i ie

!1
N jk

## Normalize weighted input of e to one

u O

e 100 vi I ik ,
i !1

k ! 1,..., K

u j u 0, j ! 1,..., M vi u 0, i ! 1,..., N

Output analysis

Pk

## Pk " 0 DMU k is in the reference set of DMU e

These dual variables can be used to contruct an efficient hypothetical composite unit (HCU) with

O j ! Pk O jk , j ! 1,..., M
k !1

Output j of HCU

I i ! Pk I ik , i ! 1,..., N
k !1

Input i of HCU

Satisfying

O j u O je , j ! 1,..., M I i e I ie , i ! 1,..., N

HCU can be used to measure excess use of inputs and potential increase in outputs

## A Data Envelopment Analysis (DEA) Example Problem Definition (1 of 5)

DEA compares a number of service units of the same type based on their inputs (resources) and outputs. The result indicates if a particular unit is less productive, or efficient, than other units. Elementary school comparison: Input 1 = teacher to student ratio Output 1 = average reading SOL score Input 2 = supplementary \$/student Output 2 = average math SOL score Input 3 = parent education level Output 3 = average history SOL score

## A Data Envelopment Analysis (DEA) Example Problem Data Summary (2 of 5)

Inputs School Alton Beeks Carey Delancey 1 .06 .05 .08 .06 2 \$260 320 340 460 3 11.3 10.5 12.0 13.1 1 86 82 81 81 Outputs 2 75 72 79 73 3 71 67 80 69

A Data Envelopment Analysis (DEA) Example Decision Variables and Model Summary (3 of 5)
Decision Variables: xi = a price per unit of each output where i = 1, 2, 3 yi = a price per unit of each input where i = 1, 2, 3 Model Summary: Maximize Z = 81x1 + 73x2 + 69x3 subject to: .06 y1 + 460y2 + 13.1y3 = 1 86x1 + 75x2 + 71x3 e.06y1 + 260y2 + 11.3y3 82x1 + 72x2 + 67x3 e .05y1 + 320y2 + 10.5y3 81x1 + 79x2 + 80x3 e .08y1 + 340y2 + 12.0y3 81x1 + 73x2 + 69x3 e .06y1 + 460y2 + 13.1y3 xi, yi u 0

Exhibit 4.22

Exhibit 4.23

Low Profit

## Designing DEA Studies

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#Inputs/Ouputs
K > 2(N+M)

Ambivalence about inputs and outputs - all should be relatively important! Approximate similarity among DMUs

objectives technology choice of units to include matters inclusion of global leader unit may be desirable

DEA Summary
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## Addresses fundamental productivity measurement problems due to ...

complexity of service outputs variability in service outputs large numbers of similar facilities diversity of practices/management/environment objective measures of productivity reference set of comparable units excess use of inputs measure returns to scale measure

## DEA Summary (cont.)



Role of DEA

data mining to generate hypotheses evaluation/measurement benchmarking to identify best practice units black box - No information on root causes of inefficiency Be aware of assumptions (e.g. linearity) Can be sensitive to selection of inputs/outputs

Caveats