Spring 2007 Seminar Series

DATE: Wednesday, May 2, 2007
LOCATION: E40-298
TIME: 4:15pm
Reception immediately following in the Philip M. Morse Reading Room, E40-106

SPEAKER:
Jan A. Van Mieghem

TITLE
The Value of Dynamic Resource Pooling: Should a service network be integrated or Product-focused?

ABSTRACT
We investigate how network design impacts capacity requirements and responsiveness, which is a natural performance indicator of quality of service. Inspired by the contrasting network strategies of FedEx and UPS, we study when two service classes (e.g., express or regular) should be served by dedicated resources (e.g., air or ground) or by an integrated network. We present analytic expressions for the delay distributions and the value of network integration through partial resource pooling, which show how the value of network integration depends on service quality (speed and reliability of service) and demand characteristics (volume average and variance of each service class and their correlation). Our results suggest that operating dedicated networks is a fine strategy (meaning that network integration is of little value) if the firm primarily serves express requests with high reliability and if the correlation with regular requests is not strongly negative. In contrast, network integration offers significant gains for firms serving primarily regular requests, almost regardless of correlation. Our analysis provides the intuition behind these findings in terms of three main drivers of integration value: arrival pooling, the substitution effect, and the correlation effect.