Decision Sciences Journal
Volume 31, Number 3
Summer 2000
Decision Making in a Standby Service System
H. V. Ravinder and Carl R. Schultz
Marketing, Information, and Decision Sciences Department, R.O.
Anderson Schools of Management, University of New Mexico, Albuquerque,
NM 87131,
e-mail: ravinder@anderson.unm.edu, schultz@anderson.unm.edu
ABSTRACT. A standby service option allows a firm to
lower its risk of not having sufficient capacity to satisfy demand
without investing in additional capacity. Standby service options
currently exist in the natural gas, electric, and water utility
industries. Firms seeking standby service are typically large
industrial or institutional organizations that, due to unexpectedly
high demand or interruptions in their own supply system, look
to a public utility to supplement their requirements. Typically,
the firm pays the utility a reservation fee based on a nominated
volume and a consumption charge based on the volume actually
taken. In this paper, a single-period model is developed and
optimized with respect to the amount of standby capacity a firm
should reserve. Expressions for the mean and variance of the
supplier’s aggregate standby demand distribution are developed.
A procedure for computing the level of capacity needed to safely
meet its standby obligations is presented. Numerical results
suggest that the standby supplier can safely meet its standby
demand with a capacity that is generally between 20 to 50% of
the aggregate nominated volume.
Subject Areas: Capacity Planning, Parameter Estimation,
and Stochastic Processes. |