Data Envelopment Analysis (DEA)

(Note: Chapter 7 Supplement)

Identifying Efficient Decision Making Units

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 Measuring Service Productivity
Branch Bank Example
1. ACCOUNTING RATIO: COST PER TELLER TRANSACTION

HIGHER RATIO WOULD BE INEFFICIENT RELATIVE TO OTHERS, BUT COULD BE

EXPLAINED BY:

1. MIX OF OUTPUTS (SELLING CD’S VS SIMPLE DEPOSITS)

2. MIX OF INPUTS (USE OF ATM’S AND LIVE TELLERS)

2. BROAD BASED MEASURE: RETURN ON INVESTMENT

OVERALL IMPORTANT BUT NOT SUFFICIENT TO EVALUATE OPERATING EFFICIENCY

OF INDIVIDUAL DECISION MAKING UNIT (DMU)

FOR EXAMPLE:

A PROFITABLE BRANCH COULD BE THE RESULT OF HIGHER-THAN-AVERAGE

PROPORTION OF REVENUE GENERATING TRANSACTIONS RATHER THAN
COST-EFFICIENT USE OF RESOURCES.

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 The DEA Model
Fractional Form
Objective Function

u1O1e  u2 O2 e    u M OMe
max Ee 
v1 I1e  v2 I 2 e    v N I Ne

Constraints

u1O1k  u2 O2 k    u M OMk
 10
. k  1, 2, , K
v1 I1k  v2 I 2 k    v N I Nk

j  0 j =1,2,…,M

i  0 i= 1,2,…,N
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DEA in Standard LP Form
(Scaling inputs to sum to 1.0)
STANDARD LP FORM(scaling inputs to sum of 1.0)

max E e  u1O1e  u2 O2 e    u M O Me

SUBJECT TO:
v1 I1e  v2 I 2 e    v N I Ne  1

u1O1k  u2 O2 k    u M O Mk   v1 I1k  v2 I 2 k    v N I Nk   0 k  1, 2, , K

where:

uj  0 j  1, 2,  , M
vi  0 i  1, 2,  , N

K  2 N  M 
RECOMMENDED SAMPLE SIZE: 4
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Table 7.5: Summary of Outputs
and Inputs for Burger Palace

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Burger Palace LP Formulation
for the First Service Unit S1
max E(S1) = u1100
subject to
u1100 − v12 − v2200 ≤ 0
u1100 − v14 − v2150 ≤ 0
u1100 − v14 − v2100 ≤ 0
u1100 − v16 − v2100 ≤ 0
u1100 − v18 − v280 ≤ 0
u1100 − v110 − v250 ≤ 0
v12 + v2200 = 1
u1, u2, v2 ≥ 0

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Figure 7.19: Productivity
Frontier of Burger Palace

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Table 7.7: Summary of DEA
Results

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Table 7.8: Calculation of Excess
Inputs Used by Unit S4

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Figure 7.21: DEA Strategic
Matrix

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Table 7.9: Outputs and Inputs
for Mid-Atlantic Bus Lines

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Case 7.3: Mid-Atlantic Bus
Lines Questions
1. Use DEA to identify efficient and inefficient
terminal operations.
2. Using the appropriate reference set of
efficient terminals, make recommendations
for change in resource inputs for each
inefficient terminal.
3. What recommendations would you have for
the one seriously inefficient terminal in
regard to increasing its outputs?
4. Discuss any shortcoming in the application of
DEA to Mid-Atlantic Bus Lines.
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