Week 7 Data Envelopment Analysis Linear Programming Technique

Data Envelopment
Analysis via Linear

Programming
Frameworks and Applications
Suri Gurumurthi, Ph.D. (2020) 1

Extending to multiple outputs ...
Ex: Consider 8 bank branches in a city working for the same 160 hrs. in a month.
Each serves business and individual customers.
Which ones are most “productive”?

Branch # Business Customers # Individual Customers
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 individual

versus business customers that any one bank can achieve, but what is it?
Ex: Consider 8 bank branches in a city working for the same 160 hrs. in a month.
Each serves business and individual customers.
Which ones are most “productive”?

Branches 1 & 6 dominate the others!
# Individual Customers # Business vs Individual
120 Customers
100
6
80 2 3
5 4 1
60
8
7
40
20
0
0 10 20 30 50 60
40
# Business Customers
Note: There is some “efficient” trade-off between the number of individual
versus business customers that any one bank can achieve, but what is it?
Branches 2, 3, 4, 5, 7, 8 are less than 100% “efficient”
73.4% distance to frontier

Efficiency Score (#5)=73.4% Branches 1 & 6 dominate the others!
# Business vs Individual
120 Customers
100
6
80 2
COMPOSITE BRANCH or ENTITY
3
5 4 1
60
8
7
40
20
0
0 10 20 30 40 50 60
# Individual Customers
“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).
“Nearest” efficient points define a reference set and a linear combination of the
reference set inputs and outputs defines a hypothetical composite unit (HCU)
Reference set for #5 = {1,6}
# Business vs Individual Customers

120
6
73.4% distance to frontier 100
Efficiency Score=73.4% 80 2 3
5 4 1
60
8
7
40
20
0
0 10 20 30 40 50 60
# Individual Customers
“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).
DEA and Efficient
Frontiers
• DEA uses an efficient frontier to define multiple I/O productivity
• 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 or Efficiency
Measure Productivity OR Ef/iciency
$! " # 𝑤!𝑌!)
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝐸 = 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑆𝑢𝑚 𝑜𝑓 𝑂𝑢𝑡𝑝𝑢𝑡𝑠 ( ∑
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑆𝑢𝑚 𝑜𝑓 𝐼𝑛𝑝𝑢𝑡𝑠(∑&%" 𝑣% 𝑋
#
%)
Inputs Outputs
equipment #type A cust.

facility space Technology #type B
+
server Decision Making cust. quality
labor index
mgmt. labor $ oper. profit
Linear Programming
Formulation:
Data
K # operting units (DMUs) k  1,...,
K N # inputs i  1,..., N
M # outputs j  1,..., M
observed level of output j from DMU
O jk
k
I ik
Model variables
observed level of input i from DMU k
vi weight on input i
u weight on output j
j efficiency of DMU (0 -
E 100%) M
u O
k
j
Ek  1N j jk
v I
i1
i ik
To evaluate a give unit, e, choose nonnegative weights to
solve ...
max
Ee s.t.
Ek �
100, k
 1,...,
K$
max Q 𝑢! 𝑂! '
Which can be formulated! " #
𝑠. 𝑡.
& Normalize weighted input of
Q 𝑣% 𝐼%' = 1 e to one
%"#
$ &
Q 𝑢! 𝑂! ( ≤ Q 𝑣% 𝐼% 𝑘=
!"# %"# 1, . . . , 𝐾
( ,
𝑢 ! ≥ 0, 𝑗=
𝑣% ≥ 1, . . . , 𝑀
0, 𝑖=
1, . . . , 𝑁
Using the results: Efficiency Vs. Profit
Matrix
High Profit
Under-performing Best practice
potential leaders comparison group
Low High
Eff. Eff.
Candidates for Under-performing

closure possibly profitable
Low Profit
DEA
Design
• “Ambivalence” about inputs and outputs - all should be
relatively important!
• “Approximate similarity” among DMUs
• objectives
• technology
• Provides relative efficiency only
• choice of units to include matters
• inclusion of “global leader” unit
may be desirable
• Experimenting with different I/O combinations may be
necessary
DEA
• Summary
Addresses fundamental productivity • Role of DEA
measurement problems due to ... • “data mining” to generate hypotheses
• complexity of service outputs
• evaluation/measurement
• variability in service outputs
• benchmarking to identify “best practice”
• Takes advantage of service operating units
environment
• large numbers of similar facilities • Caveats
• diversity of • “black box” - No information on root
practices/management/environment causes of inefficiency
• Provides useful information • Be aware of assumptions (e.g.
• objective measures of productivity linearity)
• reference set of comparable units • Can be sensitive to selection of
• excess use of inputs measure inputs/outputs
• returns to scale measure
Computing Efficiency of
DMUs
TO COMPUTE EFFICIENCY OF BRANCH # 1
MAXIMIZE Efficiency of #1 = (48 x Weight_Bus + 68 x Weight_Individual)/(160 x Weight_Labor)
DECISION VARIABLES: Weight_Bus, Weight_Individual, Weight_Labor
SUBJECT TO CONSTRAINTS: Branch # Business # Individual
Customers
• 160 x Weight_Labor = 1 (Normalize the denominator to calculate efficiency) Customers
• 0 <= (48Weight_Bus + 68Weight_Individual)/(160Weight_Labor) <= 1 1 48 68


7 36 53
• 0 <= (36Weight_Bus + 53Weight_Individual)/(160Weight_Labor) <= 1
8 15 65
• 0 <= (15Weight_Bus + 65Weight_Individual)/(160Weight_Labor) <= 1
• Weight_Bus >= 0; Weight_Individual >= 0; Weight_Labor >= 0

Computing Efficiency of DMUs:
Translating to a Linear Programming
Problem
MAXIMIZE Efficiency of #1 = 48 x Weight_Bus + 68 x Weight_Individual
Customers
• 48Weight_Bus + 68Weight_Individual <= 160Weight_Labor 1 48 68


7 36 53
• 36Weight_Bus + 53Weight_Individual <= 160Weight_Labor
8 15 65

Problem
MAXIMIZE Efficiency of #2 = 12Weight_Bus + 80Weight_Individual
Customers


7 36 53
8 15 65

Problem
Branch # Business # Individual Branch Efficiency
Customers
Customers
1 48 68 1
2 12 80 0.761905
3 35 76 0.930163
4 31 71 0.851902
5 20 70 0.733696
6 20 105 1
7 36 53 0.765217
8 15 65 0.64538
Multiple Ouputs with Different Input
Levels
MAXIMIZE Efficiency of #1 = 48 x Weight_Bus + 68 x Weight_Individual
Branch # Business # Individual # Input
DECISION VARIABLES: Weight_Bus, Weight_Individual, Weight_Labor Customers Hours
Customers
SUBJECT TO CONSTRAINTS:
1 48 68 198
• 198 x Weight_Labor = 1 (Normalize the denominator to calculate efficiency)
2 12 80 192
• 12Weight_Bus + 80Weight_Individual <= 192Weight_Labor 3 35 76 135


Multiple Outputs with Different Input
Levels Branch # Business # Individual # Input Branch
Customers Hours Efficienc
Customers y
1 48 68 198 0.909091
2 12 80 192 0.56746
3 35 76 135 1
4 31 71 185 0.667642
5 20 70 188 0.56151
6 20 105 143 1
7 36 53 135 1
8 15 65 163 0.567748

Week 7 Data Envelopment Analysis Linear Programming Technique

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Week 7 Data Envelopment Analysis Linear Programming Technique

Uploaded by

Copyright:

Available Formats

Data Envelopment

Analysis via Linear

Suri Gurumurthi, Ph.D. (2020) 1

Which ones are most “productive”?

Note: There is some “efficient” trade-off between the number of individual

Which ones are most “productive”?

73.4% distance to frontier

# Business vs Individual Customers

How do we do this analysis systematically?

equipment #type A cust.

Candidates for Under-performing

• 0 <= (48Weight_Bus + 68Weight_Individual)/(160Weight_Labor) <= 1 1 48 68

• 0 <= (20Weight_Bus + 70Weight_Individual)/(160Weight_Labor) <= 1 5 20 70

• 0 <= (20Weight_Bus + 105Weight_Individual)/(160Weight_Labor) <= 1 6 20 105

Suri Gurumurthi, Ph.D. (2020) 13

• 48Weight_Bus + 68Weight_Individual <= 160Weight_Labor 1 48 68

• 20Weight_Bus + 70Weight_Individual <= 160Weight_Labor 5 20 70

• 20Weight_Bus + 105Weight_Individual <= 160Weight_Labor 6 20 105

Suri Gurumurthi, Ph.D. (2020) 14

• 48Weight_Bus + 68Weight_Individual <= 160Weight_Labor 1 48 68

• 20Weight_Bus + 70Weight_Individual <= 160Weight_Labor 5 20 70

• 20Weight_Bus + 105Weight_Individual <= 160Weight_Labor 6 20 105

Suri Gurumurthi, Ph.D. (2020) 15

• 35Weight_Bus + 76Weight_Individual <= 135Weight_Labor 4 31 71 185

Suri Gurumurthi, Ph.D. (2020) 17

Suri Gurumurthi, Ph.D. (2020) 18

You might also like