A thermodynamic simulation model for the performance of a 4-stroke, direct-injection (DI), variable compression ratio (rc), diesel engine is presented. The model investigates the effect of varying rc on engine performance over whole engine speed range. Simulation sub-models are fuel burning rate, combustion products, thermodynamic properties of working fluid, heat transfer, fluid flow, friction, and soot and NOx formation mechanisms. Comparison of model predications with some other published experimental works with constant rc under different operating conditions results in good agreement. A comprehensive optimization analysis is conducted to an engine with specifications similar to HELWAAN M114 under normal operating conditions for seeking an optimum variation of rc to achieve a constant minimum bsfc over whole engine speed range. The study shows that, for constant minimum bsfc, optimum variation of rc lies in the range of 16.4 to 18.6 giving the following advantages over the conventional constant rc engine of 16.4: a reduction in bsfc and soot emission by about 11.9 % and 37.5 % respectively and an increase in brake power by about 12.8 %. However, that variation results in an increase in NOx, Pmax and Tmax by about 77.8 %, 16.8 % and 6.4 % respectively.