An investigation into the costs and benefits of reliability of service

The continued movement towards a global economy has contributed to the tremendous growth of competition in many industries. In order for many of these entrants to remain competitively viable, considerable attention must be focused on the impact of service quality, both on the cost side and the demand side. While a considerable literature exists on the impact of service quality and reliability on demand or cost, less work has focused on the explicit impact of service quality and reliability jointly on demand for and the cost of providing services. This paper focuses on a service provider who, faced with competition, must determine the optimal level of service quality to provide in order to maximize profits. Service quality is assumed to impact on both demand for services and the cost of providing service. A reliability constraint is appended to the formulation in order to guarantee that the declared service quality is met. Conditions are developed which characterize optimal solutions. An illustrative example is presented in order to demonstrate how results from the model may be utilized.