Proactive Data Envelopment Analysis: Effective Production and Capacity Expansion under Stochastic Environment
Lee, C-Y. and A.L. Johnson, 2014. “Proactive Data Envelopment Analysis: Effective Production and Capacity Expansion in Stochastic Environments” European Journal of Operational Research 232(1): 537-548.
33 Pages Posted: 13 Nov 2012 Last revised: 23 Feb 2018
Date Written: November 12, 2012
Demand fluctuations that cause variations in output levels will affect a firm’s technical inefficiency. This paper proposes a short-run capacity planning method termed proactive DEA, which quantifies the effectiveness of a firm’s production system under demand uncertainty. Using a novel stochastic programming DEA (SPDEA) approach, we improve upon short-run capacity expansion models by accounting for the decreasing marginal benefit of inputs and estimating the expected value of effectiveness, given demand. An empirical study of Japanese convenience stores is discussed to demonstrate the proposed model. The results show that the proposed method provides actionable advice regarding the level of variable inputs in uncertain demand environments.
Keywords: data envelopment analysis, stochastic programming, short-run capacity expansion, marginal product, demand uncertainty
JEL Classification: D24, O47, D51
Suggested Citation: Suggested Citation