Whether you build cache or not, mainly depends on how you will use the mosaic dataset.
If you are going to serve out your imagery collection for non-analytical purposes or as a backdrop, then creating cache is recommended. This applies to cases where you do not need the actual pixel values, on-the-fly processing capabilities, or dynamic mosaicking capabilities.
Cache is highly optimized and involves just retrieving pre-processed tiles as requested by a client, with no intermediate processing or resampling. This means that clients accessing your cached data will have a very fast response time.
Cache on demand
You can serve out an image service with dynamic cache – in which case, cached tiles will be generated when an area is hit for the first time. So the first access will be slow, but all subsequent access to that same area of interest will very fast.
Image Service Cache
As well, we’ve added a new functionality in ArcGIS 10.1. Instead of having to embed a mosaic dataset within a map service to cache the map service, you can now consume a single image service as either a cache or a dynamic image service. This can be achieved both within Desktop and also through web clients.
NOTE: All cache tiles are created as 8-Bit RGB.
Submitted by: Vinay Viswambharan