A supply chain case asks how goods should move from suppliers to customers, and almost always resolves into a trade-off between cost, service and risk. This page works three practice prompts through to a recommendation with the arithmetic shown.
Attempt each before reading the solution. The method behind them — how to structure the flow, what to ask, how to sequence — is covered in the supply chain optimization case guide. Figures are fictional and constructed for practice.
The frame these cases share
Every supply chain case has a service promise underneath it: what the customer has been told to expect. Two-day delivery, 98 per cent availability, a four-week lead time. Optimising cost without establishing that promise produces recommendations that save money by breaking something the client sold.
So the first question in any of these cases is: what has the client promised, and to whom? Everything after that is a trade against it.
Case 1: Inventory reduction that moves the cost
Prompt. A regional distributor of industrial parts holds $24 million of inventory across three warehouses, turning it roughly four times a year. The CFO wants to cut inventory by 30 per cent to release working capital. Availability is currently 97 per cent, and customers expect next-day delivery on stocked lines. Should they?
Solution
Establish what the inventory is doing. Inventory absorbs two kinds of variability: demand that is not perfectly predictable, and supply that does not arrive exactly when promised. Cutting the buffer without reducing either kind of variability does not remove the cost; it converts holding cost into stockout cost.
Quantify both sides.
Holding cost saved. Cutting $24m by 30 per cent releases $7.2 million of working capital. At a 12 per cent annual cost of capital and storage, the recurring saving is roughly $864,000 a year, plus the one-off cash release.
Stockout cost incurred. This needs an estimate rather than a number. If availability falls from 97 to 92 per cent, that is 5 per cent of order lines unavailable. On, say, $80 million of annual revenue at a 22 per cent contribution margin, and assuming half of unavailable lines are lost rather than backordered:
- Revenue exposed: $80m × 5% = $4 million
- Lost, at half: $2 million
- Contribution lost: $2m × 22% = $440,000 a year
On these numbers the cut looks positive — until the second-order effect. Industrial parts buyers frequently order a basket, and a missing line can lose the whole order. If a stockout on one line costs the average order rather than the line, the exposure is several times larger and the recommendation reverses.
Then find the version that does not require the trade. Inventory is rarely uniformly productive. In most distribution businesses a minority of SKUs generates the large majority of turns, while a long tail sits still. Segmenting first usually finds most of the working capital in slow-moving lines whose removal costs little availability on the lines customers actually order.
Recommendation. Do not apply a uniform 30 per cent cut. Segment by turn rate and margin, take the reduction disproportionately from the slow tail, and hold or increase cover on the fast-moving lines that drive availability. That releases most of the capital at a fraction of the service cost. Before committing, establish whether a stockout loses a line or an order, because that single fact changes the answer.
What this case tests. Whether you accept a uniform target or ask what the inventory is for, and whether you look for the second-order cost.
Case 2: How many distribution centres
Prompt. A consumer products company currently serves a national market from one central distribution centre. Outbound freight is $18 million a year and average delivery time is three days. They are considering adding two regional centres. Each would cost $4 million to build and $2.5 million a year to run. Should they?
Solution
This is a fixed-versus-variable trade with a service dimension attached, and it resolves by finding where the two cross.
The mechanism. Adding regional centres shortens the average outbound leg, which is the expensive one, and replaces it with a long-haul bulk leg into each centre, which is much cheaper per unit-mile. The saving comes from that substitution. Against it sit the new fixed costs and the extra inventory that multiple locations require.
Work the freight saving. If regional centres cut the average outbound distance by roughly half, and outbound freight is broadly distance-proportional, the outbound saving is on the order of $9 million. Add back the inbound bulk transport into two centres — say $2.5 million — and the net freight saving is roughly $6.5 million a year.
Work the added cost.
- Operating cost: 2 × $2.5m = $5.0 million a year
- Additional inventory: holding stock in three locations rather than one requires more total stock for the same service level, because pooled variability is lower than separated variability. If inventory rises from $30m to $42m, the carrying cost at 12 per cent is a further $1.44 million a year.
- Total added: $6.44 million a year
Net: roughly break-even on cost, against $8 million of upfront capital.
So the decision is not about cost. It is about what the service improvement is worth. Three days to one day is a real change in the customer proposition. If it wins share, supports a price premium, or is required to hold a major retail account, the case is strong. If customers are indifferent between one and three days, the client is spending $8 million to break even.
Recommendation. Build one regional centre, not two, in the region with the highest volume density — where the freight saving per dollar of fixed cost is greatest. Measure whether the service improvement changes customer behaviour before committing to the second. That sequencing converts an $8 million bet into a $4 million test.
What this case tests. Whether you remember that multiple locations require more inventory in total, which candidates omit routinely, and whether you recognise that a break-even cost case makes the service benefit the deciding factor.
Case 3: The cheaper supplier that costs more
Prompt. A manufacturer currently sources a component domestically at $12 a unit with a two-week lead time. An overseas supplier offers the same component at $7.50 with a ten-week lead time by sea. Annual volume is 400,000 units. Should they switch?
Solution
The unit price gap is $4.50, or $1.8 million a year. Total landed cost is the comparison that matters, and the lead time is where the difference lives.
Build the landed cost.
| Cost element | Domestic | Overseas | Note |
|---|---|---|---|
| Unit price | $12.00 | $7.50 | |
| Freight and duty | included | $0.90 | Sea freight, duty, port handling |
| Sub-total | $12.00 | $8.40 | |
| Inventory carrying | $0.06 | $0.35 | 10-week pipeline plus larger safety stock, at 12% |
| Quality and rework | $0.05 | $0.18 | Longer feedback loop; defects found later |
| Total landed | $12.11 | $8.93 |
At 400,000 units, that is a saving of roughly $1.27 million a year — still substantial, but 30 per cent smaller than the unit price implied.
Then price the risk that is not in the table. A ten-week lead time means the client is committing to demand forecasts ten weeks out. Two consequences:
- Forecast error becomes expensive. A demand upside cannot be served from a supplier ten weeks away without air freight, which can erase the saving on the units it covers.
- A disruption is a ten-week disruption. A port delay, a quality failure discovered on arrival, or a supplier problem cannot be recovered quickly.
Neither of these is a reason not to switch. They are reasons to structure the switch.
Recommendation. Dual-source. Move the predictable baseline volume — the portion of demand that is stable enough to forecast ten weeks out — to the overseas supplier, and retain the domestic supplier for variability and upside at a smaller committed volume. If 70 per cent of demand is baseline, the saving is roughly $890,000 a year while the responsiveness that protects revenue is retained.
The cost of dual-sourcing is honest and worth stating: a smaller domestic volume means a worse domestic unit price, and two suppliers cost more to manage than one. Netting those against the retained flexibility is the judgement, and it is the answer rather than a caveat to it.
What this case tests. Whether you build total landed cost rather than comparing unit prices, and whether you treat resilience as something to be designed rather than a risk to note at the end.
The habits these cases build
Establish the service promise before optimising. Build total landed cost, not unit cost. Remember that inventory is buying something, and say what, before removing it. In network questions, remember that more locations means more total inventory. And name the risk the recommendation creates — a cheaper supply chain is nearly always a more fragile one, and interviewers reward the candidate who says so before being asked.
More worked cases across other formats are in the case study library, and the advanced manufacturing and consumer packaged goods primers cover the sector context these cases assume. For a full preparation sequence, see the case interview hub.
