Fully or partially caching your map service can be an effective way to improve performance when you have a lot of detailed data or imagery. Caching works well for layers that are not frequently updated, as it can take a considerable amount of time to cache or re-cache your map service, based on layer complexity, the number of layers, and the extent of your map.

One time-saving option is to cache or re-cache your map service at a specific extent, which is great when you are only updating one area of your map, or when your detailed data/imagery does not cover the full extent of your map.

When you are ready to create your map cache in ArcCatalog, and you have set your tiling scheme and image settings, click the “Create Tiles…” button (Note: this button will say “Update Tiles” if the map service is already cached)

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This will launch the “Manage Map Server Cache Tiles” window, in which you have the option to choose a dataset to set the Update Extent (circled in red, below), or manually enter the Top, Bottom, Left and Right extents (circled in blue, below).

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You will also have the option to choose an Update Mode (red arrow, below) if you are updating your cached map service, including:

Recreate Empty Tiles – recreates tiles that are empty (because they have been deleted on disk), or tiles that are new (because the cache extent has changed or because new layers have been added to a multi-layer cache). Old tiles will be left unchanged.

Recreate All Tiles – replaces all tiles, and new tiles are added if the extent has changed, or if layers have been added to a multi-layer cache.

Delete Tiles – deletes all tiles from the cache. (Only tiles will be deleted and not the cache folder structure. There is a “Delete Map Server Cache” tool available if you wish to delete the entire cache, including folder structure.)

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Another caching option is to update specific areas using a feature class (blue arrow, above), where you can use a polygon feature class to manage tiles (create/update/delete) based on the extents of features of a feature class. For example, if you are caching a country, you might supply a feature class of major urban areas. By doing so, you are requesting that the server only pre-create tiles that cover those urban areas. The rest of the areas can be cached on demand when requested by clients. This can save you time and disk space that would be consumed by creating unneeded tiles in rural areas.

Here are some more helpful links related to caching from ESRI:
Tutorial for Creating a Cached Map Service
Creating Cache Tiles
Using a Map Cache
Tips and Best Practices for map caches
Overlaying Map Caches in the .NET web ADF