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Data Envelopment Analysis

Data Envelopment Analysis (DEA) is an increasingly popular management tool. This write-up is an introduction to Data Envelopment Analysis (DEA) for people unfamiliar with the technique. For a more in-depth discussion of DEA, the interested reader is referred to Seiford and Thrall [1990] or the seminal work by Charnes, Cooper, and Rhodes [1978].

DEA is commonly used to evaluate the efficiency of a number of producers. A typical statistical approach is characterized as a central tendency approach and it evaluates producers relative to an average producer In contrast, DEA compares each producer with only the "best" producers. By the way, in the DEA literature, a producer is usually referred to as a decision making unit or DMU. DEA is not always the right tool for a problem but is appropriate in certain cases. (See Strengths and Limitations of DEA.)

In DEA, there are a number of producers. The production process for each producer is to take a set of inputs and produce a set of outputs. Each producer has a varying level of inputs and gives a varying level of outputs. For instance, consider a set of banks. Each bank has a certain number of tellers, a certain square footage of space, and a certain number of managers (the inputs). There are a number of measures of the output of a bank, including number of checks cashed, number of loan applications processed, and so on (the outputs). DEA attempts to determine which of the banks are most efficient, and to point out specific inefficiencies of the other banks.

A fundamental assumption behind this method is that if a given producer, A, is capable of producing Y(A) units of output with X(A) inputs, then other producers should also be able to do the same if they were to operate efficiently. Similarly, if producer B is capable of producing Y(B) units of output with X(B) inputs, then other producers should also be capable of the same production schedule. Producers A, B, and others can then be combined to form a composite producer with composite inputs and composite outputs. Since this composite producer does not necessarily exist, it is typically called a virtual producer.

The heart of the analysis lies in finding the "best" virtual producer for each real producer. If the virtual producer is better than the original producer by either making more output with the same input or making the same output with less input then the original producer is inefficient. The subtleties of DEA are introduced in the various ways that producers A and B can be scaled up or down and combined.




next up previous contents
Next: Numerical Example Up: Quantitative Methods for Previous: Contents

Michael A. Trick
Mon Aug 24 16:19:33 EDT 1998