Lecture 2

DATA ENVELOPMENT ANALYSIS - II

Learning objective
To explain Data Envelopment Analysis for multiple inputs and
multiple outputs case in the form of linear programming
11.5 DEA: Multiple inputs, multiple outputs

Now, consider the case when there is more than one input affecting more than one
output. The efficiency in such case cannot be determined like in the previous case of
single input and single output. Let us see below an illustration.
The owner of a chain of coffee shops Coffees and more wants to evaluate the
efficiency of the shops in one city. The items sold as outputs in his store are in two
categories: Beverages Coffee, Tea and other drinks and Snacks Sandwiches,
Biscuits and so on. The inputs leading to the sale of these items are: Available floor
space in the store and the number of employees. The data regarding inputs and outputs
are given below in Table 11.6.
Table 11.6: Input and output data for Coffees and more
Store Location A B C D E F G
Number of
x1 40 38 50 54 44 110 66
employees
Floor space in
x2 302 262 320 336 316 510 470
100m2
Units of
y1 200 300 320 360 188 460 440
Snacks
Units of
y2 180 100 110 144 132 180 176
Beverages

To find the efficiency of each of the units and to determine the relative efficiency, we
need to give weights to each input and to each output. These weights are the
coefficients for each input and output variable. The coefficients pertaining to output
variables measure the relative decrease in efficiency with each unit reduction of output
variable. The coefficients pertaining to input variables measure the relative increase in
efficiency with each unit reduction of input variable. These weights can be either
provided by the user or can be determined optimally by using some optimization
technique like DEA.
11.5.1 User provided weights
Suppose we attach weights to inputs and outputs as given below:
Input - V1 (weight for employee strength): V2 (weight for floor space) = 5: 1
Output - U1 (weight for snack items): U2 (weight for beverages) = 1: 3

(1200)+(2180)
Thus, the efficiency of unit A = (140)+(2302)

=1.47 (no units)

The efficiency of other units are determined in similar fashion which are presented in
Table 11.7. Relative efficiency of each unit can be determined using the ratio of
efficiency of that unit and efficiency of most efficient unit as shown in Table 11.7.

Table 11.7: Relative efficiency of DMUs

Coffee store A B C D E F G

Efficiency 1.47 1.33 1.14 1.31 1.09 0.94 1.21

Relative
1 0.9 0.77 0.89 0.74 0.64 0.82
efficiency

11.6 Determination of weights using CCR model

The CCR model uses a linear programming model to assign weights or to determine
coefficients that are chosen in a manner that assigns a best set of weights/coefficients to
each of the unit. CCR stands for Charnes, Cooper and Rhodes, who introduced DEA in
1978.
In CCR model we arrange the information available from the data into a matrix format
with X to be input matrix and Y to be output matrix. The data is for n decision making
units, m inputs and s outputs similar to the one presented below. The inputs and outputs
are assumed to be known and all positive.
 Input Data Matrix
x11 x12 x1n

x x22 x2 n
X = 21


x
m1 xm 2 xmn

Output Data Matrix

y11 y12 y1n

y y22 y2 n
Y = 21


y
s1 ys 2 y sn

Now, the efficiency of each of the DMU j (Decision Making Unit the coffee store in
this case), with j = 1,2,.n is to be measured so that we can determine relative
efficiency and identify inefficient units. If there are n DMUs, we need n
optimizations, one for each DMU using following notations.
DMU o : DMU which will be evaluated in a particular trial, with o=1,2,,n. This
notation will be used for the DMU in the objective function. The same DMU in the
constraints will follow the notation DMU j as defined next.
DMU j : DMUs with j= 1,2,..n
v i : Coefficient for input i, with i = 1,2,..m
u r : Coefficient for output r, with r = 1,2,..s.

The DEA model can be presented to maximize the efficiency of DMU o , 0 ,by writing
the objective function of oth DMU as given below.

u1 y1o + u2 y2 o + ....... + u s yso

Max o =
v1 x1o + v1 x1o + ........ + vm xmo
 The model will be subjected to the constraints; (1) efficiency of all other DMUs will be
less than or equal to 1 and (2) non negativity constraints. The model will take fractional
programming form as given below.

Objective function:

u y + u y + ....... + u s yso
o = 1 1o 2 2o
(for oth DMU)
Max
v1 x1o + v1 x1o + ........ + vm xmo
Subject to constraints:

u1 y1 j + u2 y2 j + ....... + u s ysj
1 ( j = 1, 2, ......., n)
v1 x1 j + v1 x1 j + ........ + vm xmj
v1 , v2 ,......., vm 0
u1 , u2 ,......., u s 0

The fractional programming model can be converted into a linear programming model.
This is done by scaling each of the inputs to 1 and rewriting the constraints as
mentioned below.

Objective function
(for oth DMU)
Max o = u1 y1o + u2 y2 o + ....... + u s yso
Subject to
v1 x1o + v1 x1o + ........ + vm xmo = 1

u1 y1 j + u2 y2 j + ..... + u s ysj v1 x1 j + v1 x1 j + ..... + vm xmj

( j = 1, 2, ......., n)
v1 , v2 ,......., vm 0
u1 , u2 ,......., u s 0
The presented model finds the best set of weights or coefficients pertaining to each
input and output variable while maximum rating of efficiency is assigned to oth DMU.
After solving linear programming model for DMU o , the oth DMU will be efficient only
if the model results in:
 1) The optimal efficiency of oth DMU is equal to 1
2) All slacks are zero
The efficient DMUs will form efficient frontier.
If the optimal efficiency for any DMU becomes less than 1, then that DMU is
inefficient. The slack variables for inefficient units will not be zero, which means that
the DMU is utilizing one of the inputs in excess than the efficient units to produce the
same amount of output. Each inefficient DMU will have a set of efficient units, which
would act as a reference set to improve the performance of inefficient units. When we
will solve the linear programming model for DMU o , the shadow prices of the
constraints pertaining to efficient units in that model will help in determining the point
on the efficient frontier where the inefficient unit can be projected to make it efficient.
The projected point is a linear combination of efficient units where the coefficients of
those linear variables are the shadow prices of efficient constraints.

Example: Multiple Inputs and Multiple Outputs

Super labs are in Research and Development of electronic goods. The founders, in the
year 2001 decided to set-up their own company to produce consumer electronic goods
that use the state-of-the art technologies that have been developed by them. The
company has set up business in North America and quickly moved to Asia, Europe,
Africa and South America. The main products of the company are its impressive range
of Smart phones, Tablet PCs and Laptops.
At the beginning of the year 2011, the CEO- global operations of the company
quickly pulled reports of Inputs and Outputs that are being used and produced at various
regions in which company operates.
He arrived at the following figures:
 INPUTS ($ in millions) OUTPUTS (numbers in '000)

DMU
Product
Marketing Smart Phones Tablets Laptops
Development
N.America 5 14 9 4 16
Europe 10 18 8 2 9
Asia 9 16 9 4 10
Africa 7 12 6 1 8
S.America 9 15 10 4 14

The data tells him how much each of the regions consume for the two main activities,
namely Product development and Marketing, and how many units of its products are
being sold. However, he is unable to figure out, which are the best performing units and
how much of increase or decrease the Regional directors are to be advised to make on
investments.
One of his analysts recommends the use of Data Envelopment Analysis to analyze the
performance of the different units and then make a conclusion. The analyst also
mentioned that the tool can be best used as the inputs and outputs to the various
Decision Making Units are the same units ($ spent of product development, marketing
and number of units of each product sold).
The analyst quickly arrived at the following formulation:
For each of the inputs, assign weights u1 , u2 and assign weights v1 , v2 and v3 for the
outputs. Therefore the formulation for the five DMUs would be as follows:

For Unit 1 (N.America):

Objective function
Maximize 9v1 + 4v2 + 16v3
Subject to the constraints:
5u1 + 14u2 =
1
 (9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(8v1 + 2v2 + 9v3 ) (10u1 + 18u2 ) 0
(9v1 + 4v2 + 10v3 ) (9u1 + 16u2 ) 0
(6v1 + 1v2 + 8v3 ) (7u1 + 12u2 ) 0
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(10v1 + 4v2 + 14v3 ) (9u1 + 16u2 ) 0
u1 , u2 0
v1 , v2 and v3 0

For Unit 2 (Europe):

Objective function
Maximize 8v1 + 2v2 + 9v3
Subject to the constraints:
10u1 + 18u2 =
1
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(8v1 + 2v2 + 9v3 ) (10u1 + 18u2 ) 0
(9v1 + 4v2 + 10v3 ) (9u1 + 16u2 ) 0
(6v1 + 1v2 + 8v3 ) (7u1 + 12u2 ) 0
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(10v1 + 4v2 + 14v3 ) (9u1 + 16u2 ) 0
u1 , u2 0
v1 , v2 and v3 0

For Unit 3 (Asia):

Objective function
Maximize 9v1 + 4v2 + 10v3
Subject to the constraints:
9u1 + 16u2 =
1
 (9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(8v1 + 2v2 + 9v3 ) (10u1 + 18u2 ) 0
(9v1 + 4v2 + 10v3 ) (9u1 + 16u2 ) 0
(6v1 + 1v2 + 8v3 ) (7u1 + 12u2 ) 0
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(10v1 + 4v2 + 14v3 ) (9u1 + 16u2 ) 0
u1 , u2 0
v1 , v2 and v3 0

For Unit 4 (Africa):

Objective function
Maximize 6v1 + 1v2 + 8v3
Subject to the constraints:
7u1 + 12u2 =
1
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(8v1 + 2v2 + 9v3 ) (10u1 + 18u2 ) 0
(9v1 + 4v2 + 10v3 ) (9u1 + 16u2 ) 0
(6v1 + 1v2 + 8v3 ) (7u1 + 12u2 ) 0
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(10v1 + 4v2 + 14v3 ) (9u1 + 16u2 ) 0

u1 , u2 0

v1 , v2 and v3 0

For Unit 5 (S.America):

Objective function
Maximize 8v1 + 2v2 + 9v3
Subject to the constraints:
10u1 + 18u2 =
1
 (9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(8v1 + 2v2 + 9v3 ) (10u1 + 18u2 ) 0
(9v1 + 4v2 + 10v3 ) (9u1 + 16u2 ) 0
(6v1 + 1v2 + 8v3 ) (7u1 + 12u2 ) 0
(9v1 + 4v2 + 16v3 ) (5u1 + 14u2 ) 0
(10v1 + 4v2 + 14v3 ) (9u1 + 16u2 ) 0

u1 , u2 0
v1 , v2 and v3 0
The above presented models can be solved using any optimization software or using
excel. On solving the above linear programming models in Excel for all the units, the
following efficiencies for the DMUs were found.

DMU Efficiency
N.America 1
Europe 0.67
Asia 0.875
Africa 0.75
S.America 1

Now, CEO likes to compare the efficiency of the unit in Europe (inefficient unit) with
other efficient units. It is found that the shadow prices of the efficient units that are N.
America and S. America to be 0.157 and 0.657 respectively. So, N. America and S.
America forms the reference set for Europe. The linear combination of a particular
input for two efficient units using shadow prices as multiplier, will give the point on the
efficient frontier where the inefficient unit can be projected. That is Europe should
brought down the product development expenses from 10 to 6.698 (5 x 0.157 + 9 x
0.657).
Inputs and
North America South America
Outputs
Excess used
Sum of Total
Values Weights Total 1 Values Weights Total 2 Europe by the unit
1 and 2
Europe
Product
5 0.157 0.785 9 0.657 5.913 6.698 10 3.302
Development

Marketing 14 0.157 2.198 15 0.657 9.855 12.053 18 5.947

Smart Phone 9 0.157 1.413 10 0.657 6.57 7.983 8 0.017

Tablets 4 0.157 0.628 4 0.657 2.628 3.256 2 -1.256

Laptops 16 0.157 2.512 14 0.657 9.198 11.71 9 -2.71

Thus on comparing the inputs and outputs of Europe with that of N and S America,
Europe to reduce Product development and Marketing costs by 3.302 and 5.947 (000s
of dollar value) and increase sales of Tablets and Laptops by 1.256 and 2.71 units
respectively to reach the values of the efficient units. The sale of Smart phones is
however to the level of the efficient units N and S America. Thus the changes to be
made to the other inefficient DMUs can be analyzed.