Data Envelopment Analysis (DEA)

Identifying Efficient Decision Making Units

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 CDs vs simple deposits)
2. Mix of inputs (use of ATMs 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.

THE DEA MODEL

Fractional Form
Objective Function
max Ee

u1O1e u2 O2e u M OMe

v1 I1e v2 I 2 e v N I Ne

Constraints
u1O1k u2 O2 k u M OMk
10
.
v1 I1k v2 I 2 k v N I Nk
j 0

j =1,2,,M

i 0

i= 1,2,,N

k 1, 2, , K

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 OMe

SUBJECT TO:

v1 I1e v2 I 2 e v N I Ne 1

u1O1k u2 O2 k u M O Mk v1 I 1k v2 I 2 k v N I Nk 0
where:
uj 0

j 1, 2, , M

vi 0

i 1, 2, , N

RECOMMENDED SAMPLE SIZE:

K 2 N M

k 1, 2, , K

Burger Palace Example

SUMMARY OF OUTPUTS AND INPUTS FOR BURGER PALACE
Service unit
1
2
3
4
5
6

Meals sold
100
100
100
100
100
100

Labor-hours
2
4
4
6
8
10

Material dollars
200
150
100
100
80
50

LP MODEL FOR EVALUATION OF SERVICE UNIT 1

max E ( S1 ) u1100

subject to:

u1100 v1 2 v2 200 0
u1100 v1 4 v2 150
u1100 v1 4 v2 100
u1100 v1 6 v2 100
u1100 v1 8 v2 80
u1100 v110 v2 50

0
0
0
0
0

v1 2 v2 200 1
u1 , v1 , v2 0

Burger Palace
Productivity Frontier
Material dollars

200

S1 (2,200)

150

S2 (4,150)

100

S3 (4,100)

S4 (6,100)
S5 (8,80)

C (5.3, 88.9)

50

S6 (10,50)

0
0

Labor hours

10

Summary of DEA Results

SUMMARY OF DEA RESULTS

Service unit

Efficiency
rating (E)

S1
S2

1.000
0.857

S3
S4

1.000
0.889

S5

0.901

S6

1.000

Efficiency
reference set

S1
S3
S3
S6
S3
S6

Relative labor-hour
value v1

Relative material
value v2

.1667
.1428

.0033
.0028

.0625
.0555

.0075
.0067

.0568

.0068

.0625

.0075

N.A.
(.2857)
(.7143)
N.A.
(.7778)
(.2222)
(.4545)
(.5454)
N.A.

CALCULATION OF EXCES INPUTS USED BY UNIT S4

Outputs and
inputs

Composite
reference
unit C

Reference set

S3
Meals
Labor-hours
Material $

(.7778)
(.7778)
(.7778)

100
4
100

S6
+
+
+

(.2222)
(.2222)
(.2222)

100
10
50

Excess
inputs used

S4
=
=
=

100
5.3
88.9

100
6
100

0
0.7
11.1

DEA and Strategic Planning

High
Profit
Low

Under-performing
potential stars

Benchmark
group

Problem
Branches

Candidates
for divestiture

Low

Efficiency

High