Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 1 Telecommunications: Introduction of new service Service: internet access through phone line Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs, time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers Decisions: Locations of servers, pricing, number of servers in Phase 1 and Phase 2; Strategies: –Phase 1 deployment now, look for user response, Phase 2 deployment later; –real options: option to expand, option to abandon

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 2 Decision quality, objectives Short time to market Profit Demand satisfaction Cost Total cost for the network and server operations Network operation patterns and customer behavior patterns which can be learned during phase 1, utilize them for phase 2

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 3 Step 1: Simplest case Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs, time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers Decisions: Locations of servers, pricing, number of servers in Phase 1 Strategies: –phase 1 deployment now, look for user response, phase 2 deployment later; –real options: option to expand, option to abandon

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 4 Step 1: Mathematical model Building blocks: regions, server locations Decisions: whether to put server in location - binary variable, amount of service provided by server in location to region Parameters, data: fixed cost for putting server in location, cost for providing a unit of service from location to region, demand for service from region i, server capacity

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 5 Step 1: Mathematical model Objectives and structural relations : total costs –Total served demand for region i –Total demand served from server in location j

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 6 Step 1: Mathematical model Decision model: find decisions and from minimization of total costs subject to satisfaction of demand and to structural constraints

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 7 Step 2: Introducing uncertainty Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs, time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers Decisions: Locations of servers, pricing, number of servers in Phase 1 Strategies: –phase 1 deployment now, look for user response, phase 2 deployment later; –real options: option to expand, option to abandon

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 8 Step 2: Introducing uncertainty Description of uncertainty –demand: scenarios Dependence of decisions on available information Introduction of time. Two decision periods: now and future Make some decisions now and correct them in the future when more information will be available. Decision which we make now should allow decision flexibility and adaptation in the future

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 9 Description of demand uncertainty: scenarios – value of demand under scenario r – probability (frequency) of scenario r Time structure of decisions: –now: placement of servers –future correction: assignment of demand to servers when demand scenario r will be known now future

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 10 Model of two stage decision process Decision to take now: –find server placement which minimize current placement cost and average future demand service cost where is cost of servicing customers under demand scenario r given server placement y

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 11 Decision to take in the future: Given demand scenario r and server placement y, find the customer assignment which yields the minimal service costs : subject to satisfaction of demand and to structural constraints

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 12 Combining current and future decisions in the same model Find server placement which minimize current placement cost and average future demand service cost

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 13 Step 3: Enriching decision flexibility: option to expand Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs, time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers Decisions: Locations of servers, pricing, number of servers in Phase 1 Strategies: –phase 1 deployment now, look for user response, phase 2 deployment later; –real options: option to expand, option to abandon

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 14 Model of two stage decision process Decision to take now: –find server placement and demand assignment which minimize current placement cost and average future demand service cost Discount coefficient

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 15 Decision to take in the future: Given demand scenario r and Phase 1 server placement y, find expansion program for Phase 2 and new demand assignment which yield the minimal expansion and service costs : subject to satisfaction of demand and to structural constraints Admissible number of servers at j

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 16 Combined model Find Phase 1 server placement and current demand assignment which minimize current placement cost and average Phase 2 expansion and demand service cost