BU283 Lecture Notes - Lecture 9: Exponential Distribution, Poisson Point Process, Customer Retention
Document Summary
Most problems center around finding ideal level of service that firm should provide: level of service is usually an option over which management has control. Supermarkets must decide number of cash registers to open; Service costs increase as level of service increased but waiting costs decrease. Service costs decrease as level of service decreased but waiting costs increase: look at total expected cost (service, waiting, other) Waiting cost reflects lost productivity of workers while machines or tools awaiting repairs, cost of customers lost because of poor service and long queues. So there are strong economic reasons for studying this! Given a specified shortage or waiting cost function the analysis is straightforward. Define: wc = expected waiting cost per time unit, sc = expected service cost (capacity cost) per time unit, tc = expected total system cost per time unit. The objective is to minimize the total expected system cost. Total cost (tc) = cost of service + cost of waiting.
