Capacity, supply chain, and footprint
Can we make and move enough: comparing demand with capacity along the chain, fixing the link that limits it at the lowest cost, and choosing where to place capacity.
Key takeaways
- Compare each link's capacity with demand and lead with the one that limits the chain, rather than assuming the factory is the limit because it is the most visible.
- These cases are often quantitative and reward careful exhibit reading.
- The strong answer checks the whole chain and prices the fix. The weak one fixes the most visible link instead of the limiting one.
- Why a generic structure scores lower: Assuming the factory is the limit because it is the most visible part of the chain misses the link that actually breaks.
What this case type is and when it shows up
A capacity or supply-chain case asks whether the company can make and move enough to meet demand, and where to add or place capacity. Like operations, it is about finding the one link that limits the whole chain.
The underlying theory, in plain language
Lay the chain out (supply of inputs, production, storage, transport, demand) and compare the capacity of each link with the demand flowing through it. The link with the smallest capacity relative to demand limits the whole chain.
Required utilization is demand divided by capacity. A link that would need more than 100 percent cannot meet demand; one close to 100 percent has no room for peaks.
Footprint questions (where to build or place capacity) compare cost to serve: the cost to make a unit at each location plus the cost to deliver it to customers. A cheap plant far from demand can cost more per delivered unit than a dearer plant close by. Resilience and access to suppliers also matter.
What the prompts sound like, from simple to hard
- Simple: can our one plant in Vietnam meet next year's demand.
- Medium: which link in the chain will break first as demand grows 15 percent.
- Hard: where to place a new warehouse to serve growing Gulf markets at the lowest cost to serve.
Build the structure from the goal
Three moves that give you the structure
- 1Start from the decision. Can the client meet demand, and what is the cheapest way to add the capacity it lacks: where, and owned or rented?
- 2Write the maths of the goal. Units delivered = the lower of demand and the capacity of each link (suppliers, production, storage, transport). For a location choice: cost per unit served = production + handling + delivery, and a new site pays when the saving per unit x volume covers its fixed cost.
- 3Let the business pick the branches. Which link breaks first depends on the product. Heavy, low-value goods such as water or cement are limited by transport cost and distance. Fresh and frozen food is limited by cold storage and time. Online retail is limited by warehouse space and delivery promises.
- Which link limits summer deliveries?
- Production lines per day
- Key: Cold storage: pallets of space
- Refrigerated trucks
- Fixes: rent cold storage for the peak, or build
This comes from units delivered = the lower of demand and each link. Frozen food must stay cold at every step, so cold storage is the likely limit.
- Cost per car delivered from each site
- Labour and energy cost per car
- Key: Shipping and import duties to the main markets
- Suppliers nearby
- Fixed cost of the plant and break-even volume
Same maths, a location choice. For cars, duties and shipping can outweigh labour savings, so the cost of reaching the main markets leads.
Assuming the factory is the limit because it is the most visible part of the chain misses the link that actually breaks. The score goes to the candidate who checks every link against demand.
Crack any case in five movesFinding and narrowing the real problem
Key idea
Compare each link's capacity with demand and lead with the one that limits the chain, rather than assuming the factory is the limit because it is the most visible. Then compare fixes on cost.
Names you may hear, kept as questions that fall out of the goal maths
- Chain capacity scan: Which link has the least capacity compared with demand? Where it stops helping: Capacities and demand shift with the seasons; one snapshot can mislead.
- Cost to serve by location: What does each unit cost to make and deliver from each site? Where it stops helping: Soft factors such as resilience and supplier access matter too.
- Make, buy, or rent capacity: Is it cheaper to own the capacity or to use a third party, given how steady demand is? Where it stops helping: Third parties add flexibility but reduce control.
Methods for solving this type
- Map the chain and its link capacities
- Compare each with demand
- Find the limiting link and the value of the shortfall
- Compare fixes on cost
- Place capacity where cost to serve is lowest
The math patterns it relies on
- Demand versus capacity per link
- Required utilization = demand / capacity
- Lost units x contribution
- Cost to serve = production cost + delivery cost per unit
Worked cases
Worked case
Which link breaks first, and the cheapest fix
The prompt
A bottled-water company in Indonesia, which reports in US dollars, expects demand of 1,000,000 cases next year. Its plant can make 1,200,000 cases, but its own trucks can move only 900,000. Each case earns USD 2 of contribution. It can hire a third-party logistics firm at USD 0.60 per case, or run more trucks of its own for USD 150,000 a year, adding 150,000 cases of transport capacity. The table below shows each link in the chain. Can it meet demand, and what is the best fix?
Interviewer-led: the interviewer shows the chain table and asks which link breaks, what it costs, and which of two fixes to choose.
Clarifying questions, with the interviewer's answers
- Is demand even across the year?Answer: It peaks in the dry season, but assume even demand for now.
- Could we sell unmet demand later?Answer: No, customers switch to other brands.
A hypothesis to say out loud: The plant has spare capacity, so my hypothesis is that transport, not production, is the limit, and that renting transport is cheaper than owning more.
The structure
- Compare each link with demand, then compare fixesThis comes from cases delivered = the lower of demand, production capacity, and transport capacity; each fix is judged on its cost.
- Production versus demand
- Key: Transport versus demand
- Fix: third-party logistics or own trucks
The exhibit
| Link in the chain | Capacity next year (cases) | Demand next year (cases) |
|---|---|---|
| Bottle and cap supply | 1,500,000 | 1,000,000 |
| Production (plant) | 1,200,000 | 1,000,000 |
| Transport (own trucks) | 900,000 | 1,000,000 |
Working it through
1. Production
Capacity of 1,200,000 against demand of 1,000,000, so production has spare capacity.
Production slack (cases):1,200,000 - 1,000,000 = 200,0002. Transport
Transport can move 900,000 against demand of 1,000,000.
Transport shortfall (cases):1,000,000 - 900,000 = 100,0003. Required utilization of transport
Meeting demand would need the trucks to run above 100 percent of capacity, which is impossible.
Required transport utilization (%):1,000,000 ÷ 900,000 × 100 = 1114. Cost of doing nothing
100,000 cases of lost sales at USD 2 of contribution each.
Lost contribution (USD):100,000 × 2 = 200,0005. Fix A: third-party logistics
Move the 100,000 extra cases at USD 0.60 each.
Net gain with third party (USD):100,000 × (2 - 0.6) = 140,0006. Fix B: own trucks
The extra trucks cost USD 150,000 a year but only 100,000 of their 150,000 cases of capacity are needed.
Net gain with own trucks (USD):100,000 × 2 - 150,000 = 50,0007. When would owning trucks win?
Third-party transport would cost as much as the trucks only at this many cases, more than the 150,000 the trucks can carry.
Cost-equal volume (cases):150,000 ÷ 0.6 = 250,000
What the exhibit shows
Only transport is below demand, so it is the link that limits the chain; supply and production have spare capacity.
The recommendation
Hire a third-party logistics firm for the extra volume, and do not add production. First, we can make enough but cannot move enough: transport falls 100,000 cases short, which would lose USD 200,000 of contribution. Second, the third party costs about USD 60,000 and keeps USD 140,000 of profit, against a net USD 50,000 from running more of our own trucks; at USD 0.60 per case, renting stays cheaper for any shortfall the extra trucks could carry. Third, production and bottle supply already have spare capacity, so more plant capacity would change nothing. Before the dry season, check whether peak demand also stresses the plant.
Risks: Third-party capacity may be scarce in the peak season; Service quality from a third party may be harder to control.
Next steps: Get quotes from two logistics firms with peak-season guarantees; Model the dry-season peak month by month.
A strong candidate
Checked every link, found transport was the limit, valued the shortfall, and compared two fixes on cost.
A weak candidate
Recommended a bigger factory, which already had spare capacity.
Worked case
Where should a Gulf online retailer put its next warehouse?
The prompt
A Dubai-based online home-goods retailer serves the UAE and Saudi Arabia from one warehouse in Dubai, which will be full in two years. Should it expand in Dubai or open a new warehouse in Riyadh?
Candidate-led: you set up a cost-to-serve comparison and ask for the costs; the interviewer answers what you ask.
Clarifying questions, with the interviewer's answers
- Where are the customers?Answer: About 1.5 million orders a year in the UAE and 2 million in Saudi Arabia, and Saudi orders are growing faster.
- Where are we today?Answer: One warehouse in Dubai serves both countries.
- What matters most: cost or delivery speed?Answer: Cost first, but Saudi customers complain about four-day delivery.
A hypothesis to say out loud: Shipping every Saudi order across the border adds trucking and customs cost to each order. My hypothesis is that a Saudi warehouse lowers cost to serve enough to cover its fixed cost, and also speeds up delivery.
The structure
- Cost to serve Saudi orders from each locationThis comes from cost per order = warehouse handling + delivery for each site; a new site needs enough orders to break even on its fixed cost.
- Per-order cost: warehouse handling plus delivery
- Key: Fixed cost of a new site and break-even orders
- Payback of the setup cost
- Speed and resilience
Working it through
1. Serve Saudi from Dubai
Candidate: "What does a Saudi order cost us today?" Interviewer: "Handling in Dubai is AED 12 an order, and cross-border trucking plus customs is AED 28."
Cost per Saudi order from Dubai (AED):12 + 28 = 402. Serve Saudi from Riyadh
Interviewer: "A smaller Riyadh site would cost AED 15 an order to handle, and local delivery AED 10."
Variable cost per order from Riyadh (AED):15 + 10 = 253. Yearly cost from Dubai
2 million Saudi orders at AED 40.
Yearly cost, Dubai option (AED):2,000,000 × (12 + 28) = 80,000,0004. Yearly cost from Riyadh
Candidate: "What does the Riyadh site cost to run?" Interviewer: "AED 18 million a year in rent, staff, and systems."
Yearly cost, Riyadh option (AED):2,000,000 × (15 + 10) + 18,000,000 = 68,000,0005. Break-even orders
The Riyadh site saves AED 15 an order, so it needs this many Saudi orders a year to cover its fixed cost. Today's 2 million is well above it.
Break-even Saudi orders a year:18,000,000 ÷ ((12 + 28) - (15 + 10)) = 1,200,0006. Payback
Interviewer: "Setting up Riyadh costs AED 30 million one time." Candidate: "At AED 12 million saved a year, that pays back in two and a half years."
Payback (years):30,000,000 ÷ (80,000,000 - 68,000,000) = 2.57. Upside from faster delivery
Candidate: "Would one-day delivery sell more?" Interviewer: "Tests suggest about 10 percent more Saudi orders, at AED 45 of contribution each." Candidate: "I will treat that as upside, not as part of the case."
Extra contribution from faster delivery (AED a year):2,000,000 × 0.1 × 45 = 9,000,000
The recommendation
Open a warehouse in Riyadh rather than expanding in Dubai. First, it cuts the cost of a Saudi order from AED 40 to AED 25, saving about AED 12 million a year after its AED 18 million of running costs. Second, it breaks even at 1.2 million Saudi orders a year, well below today's 2 million, and pays back its AED 30 million setup in about two and a half years. Third, one-day delivery could add about AED 9 million a year of contribution, and a second site makes the business less exposed to a single warehouse or border crossing. Keep the Dubai site for UAE orders, which frees space there.
Risks: Saudi order growth could slow, although the site covers its costs down to 1.2 million orders; Licensing and hiring in a new country may delay the opening; check current rules; Handling costs at a new, smaller site may start higher than planned.
Next steps: Shortlist three sites in Riyadh and get rent and labor quotes; Confirm the current licensing steps for a Saudi warehouse with local advisers; Plan which products to stock in Riyadh first.
A strong candidate
Compared the full cost to serve from each location, found the break-even volume and payback, and kept the speed benefit as upside rather than relying on it.
A weak candidate
Chose to expand in Dubai because handling there is cheapest per order, ignoring the AED 28 of cross-border cost on every Saudi order.
Prompt: "Can we meet next year's demand?"
Weaker answer
Assumes the factory is the constraint and proposes expanding it, ignoring that transport is the real limit.
Stronger answer
Compares each link with demand, finds transport limits the chain, values the lost sales, and picks the cheaper of two transport fixes.
Why the stronger answer wins: The strong answer checks the whole chain and prices the fix. The weak one fixes the most visible link instead of the limiting one.
Common mistakes, traps, and curveballs
- Assuming production is the limit when transport or supply is
- Building capacity that an upstream link cannot feed
- Ignoring seasonal peaks
- Choosing a fix without comparing its cost with the alternatives
- Placing capacity far from where demand is growing
These cases are often quantitative and reward careful exhibit reading. Expect a table of capacities and a clear limiting link to find. Formats differ by office and change over time, so check the current process for your target office.
Practice
Plant A in Saudi Arabia makes a unit for SAR 3.0 and ships it to customers for SAR 2.0. Plant B makes it for SAR 3.5 and ships it for SAR 1.0. What is the lower cost to serve per unit, in SAR?
A warehouse in Jeddah runs at 85 percent of its capacity. Demand grows by 20 percent. What utilization would it need, in percent?
A truck in Malaysia carries 1,200 cases per trip, and a trip costs SGD 900 through a Singapore-based carrier. What is the transport cost per case, in SGD?
Required utilization is 70 percent for production, 98 percent for warehousing, and 80 percent for trucks. Demand will grow 10 percent. Which link breaks first?
A plant can make 150 units a day, but its only supplier can deliver inputs for 120. Demand is 140 units a day. What limits output?
Plant X makes a unit more cheaply than Plant Y, but is far from customers. How should you compare them?
Find the link that limits the chain by comparing each with demand, then choose the cheapest fix for that link.
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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