Data Envelopment Analysis (DEA)

2003 Thomson/South-Western

Slide 1

DEA is an application of linear

programming used to determine the
less productive (inefficient) service
units among a group of similar
service units. DEA bases this
determination on the inputs
(resources) and outputs of the
2003 Thomson/South-Western

Slide 2

Examples of service institutions:

Private: banks, restaurants, postal
service, utility suppliers,
telecommunication company etc.
Government: schools, hospitals, local
councils, government departments &
agencies (immigration, police,
RISDA, FELDA, etc.)
2003 Thomson/South-Western

Slide 3

The model solution indicates if a

particular unit is less productive,
inefficient compared to other units.

2003 Thomson/South-Western

Slide 4

Example 1
A

Bank (33 branches) wanted to

know which branches are efficient
and which are inefficient.
The bank identified 5 inputs
available to all branches: customer
service, sales service, management,
expenses, office space.

2003 Thomson/South-Western

Slide 5

Example 1
5

groups of branch outputs were

also identified: (deposits,
withdrawal), (bank check, travelers
check, bonds), (night deposits),
(loans), & (new accounts).

2003 Thomson/South-Western

Slide 6

RESULTS

The DEA model found that:

Only 10 branches were operating
efficiently.
23 branches were inefficient (using
excess input to produce the output).
The DEA results can be used to
review the branch operations.
To check the operating differences &
best practice branches.
2003 Thomson/South-Western

Slide 7

RESULTS

The bank:
was able to improve its branch
productivity and profits.
reduced its total branch staff by
20% within one year.
new operation resulted annual savings
of RM6 million.

2003 Thomson/South-Western

Slide 8

Now let see an application of DEA

in education system
Consider a town with 4 primary schools:
SKA, SKB, SKC & SKD.
The state has implemented a series of
standards of learning (SOL) in reading,
mathematics and history for standard
5 students.
The average scores are a measurable
outputs of the schools performance.

2003 Thomson/South-Western

Slide 9

Thus, every school has 3 output: SOL

for reading (SOLR), SOL for maths
(SOLM) and SOL for history (SOLH).
The input considered are:
Teacher-to-student ratio (TSR)
Supplementary funds per student
(SF)
Parents educational level (12=high
school & below, 16=graduate) (PEL)

2003 Thomson/South-Western

Slide 10

INPUTS
School

TSR

SF

PEL

SKA

0.06

RM260

11.3

SKB

0.05

RM320

10.5

SKC

0.08

RM340

12.0

SKD

0.06

RM460

13.1

2003 Thomson/South-Western

Slide 11

OUTPUTS
School

SOLR

SOLM

SOLH

SKA

86

75

71

SKB

82

72

67

SKC

81

79

80

SKD

81

73

69

2003 Thomson/South-Western

Slide 12

Which school are less efficient in

converting their inputs to outputs
relative to other elementary schools
in town? Lets check SKD.
First, let us build the model.

2003 Thomson/South-Western

Slide 13

Decision Variables:
In DEA, the decision variables are
price per unit output and price per
unit input
xi = a price per unit of each output
yi = a price per unit of each input
2003 Thomson/South-Western

Slide 14

Decision Variables:
x1 = a price per unit SOLR
x2 = a price per unit SOLM
x3 = a price per unit SOLH
y1 = a price per unit TSR
y2 = a price per unit SF
y3 = a price per unit PEL
2003 Thomson/South-Western

Slide 15

Objective function
To maximize the value of SKD outputs,
which also equal efficiency.

Maximize:

Z 81x1 73 x 2 69 x3

2003 Thomson/South-Western

Slide 16

Model Constraints
To be able to compare between schools,
the total value of each schools input
must be scaled to 1.
SKD

0.06 y1 460 y2 13.1 y3 1

Scaling SKD inputs to 1 forces the value

of SKDs output to 1 or less.
2003 Thomson/South-Western

Slide 17

Model Constraints
value of output
efficiency

value of input

It is not possible for a school to be more

100% efficient, thus
value of output
efficiency

value of input

2003 Thomson/South-Western

Slide 18

Model Constraints
value of school ' s output
efficiency

value of school ' s input

or

value of school ' s output value of school ' s input

This inequality will give us 4 constraints,

one for each school.
2003 Thomson/South-Western

Slide 19

Model Constraints
value of school ' s output value of school ' s input

86 x1 75 x 2 71x3 0.06 y1 260 y 2 11.3 y 3

82 x1 72 x2 67 x3 0.05 y1 320 y2 10.5 y3
81x1 79 x2 80 x3 0.08 y1 340 y2 12.0 y3
81x1 73x2 69 x3 0.06 y1 460 y2 13.1y3
2003 Thomson/South-Western

Slide 20

MODEL SUMMARY
Maximize:

Z 81x1 73 x 2 69 x3

Subject to 0.06 y1 460 y2 13.1 y3 1

86 x1 75 x 2 71x3 0.06 y1 260 y 2 11.3 y 3

82 x1 72 x2 67 x3 0.05 y1 320 y2 10.5 y3
81x1 79 x2 80 x3 0.08 y1 340 y2 12.0 y3

81x1 73 x2 69 x3 0.06 y1 460 y2 13.1 y3

xi , y i 0
2003 Thomson/South-Western

Slide 21

The objective of this model is to determine

whether SKD is efficient/inefficient. If
the value of Z (objective function) is equal
to 1, the school is efficient. If Z is less
than
1, it isofinefficient.
The value
the decision variable have
little meaning for us.
TRY SOLVE THE MODEL USING
EXCEL SOLVER!
2003 Thomson/South-Western

Slide 22

Food of thought
Pure mathematics is the world's best
game. It is more absorbing than
chess, and lasts longer than Monopoly.
It's free. It can be played anywhere
- Archimedes did it in a bathtub.

2003 Thomson/South-Western

Slide 23