Heavy Inventory

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Problem Definition

As a B2B firm we manufacture test equipment for electronics firms. The revenue per product ranges from $500 to $100,000 as this is a high complexity business.

On an average we hold 200 days of inventory which we would like to bring down to 100. What do you think we should do?


The case is designed to be presented to the candidate by an interviewer, who plays the role of a representative of an electronic test equipment manufacturer.

The interviewee is to be tested on developing an understanding of the supply chain, and asking the right questions to extract the given information.

Short Solution (Expand)

Detailed Solution

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

I. Supply Chain

When asked about the supply chain model of the business, provide the following information to the candidate.

Sales department upon receiving the order from the customer determines the requirements and informs the manufacturing team.
  • We design the circuit boards but outsource their manufacturing. We buy the raw materials required for the making of the circuit boards and send them for assembly. These components (raw materials) are of two types:
    • Type A: These are standard components which can be purchased from distributors as and when needed. Generally required in large volumes, the lead time of Type A components is approximately 10 days
    • Type B: We prepare the design of these custom components and send it to distributors who manufacture them. Lead time of Type B components is usually around 7-8 months. There is little opportunity of improvement here
  • Post the manufacturing of the circuit boards (approx. 10 days), we assemble the product out of circuit boards and base units

II. Additional information

When asked about the costs incurred or inventory, provide the following information to the candidate.

Costs: For a typical circuit board, the cost of standard (33.33%) and custom components (33.33%) is the same as the cost of assembling those (33.33%) by the distributor.

  • Best-in-Class companies hold 50 days worth inventory
  • Inventory comprises of two things:
    • Base units (low price)
    • Circuit boards or subassemblies (high price)
  • We manufacture as high as 30,000 type of product configurations with different features and subassemblies
  • The movement pace of the subassemblies differs a lot; some move very fast, some very slow and occasionally have to be scrapped when a new version of the product comes into the market
  • We guarantee 5 weeks delivery time to the customers upon order receipt

III. Solution

The interviewee is to be tested on developing an understanding of the supply chain, and asking the right questions to extract the given information.

1. Reduce the number of subassemblies

You could pool and reduce the demand variation by focussing more on the manufacturing of circuit boards which do a large set of functions but enabling only the set requested and paid by the customer. This should lead to lower inventories.

2. Pool Type A components with the outsourced manufacturer

You could sell the Type A components to the outsourced manufacturer provided he has demand for those components for his other customers. This should also reduce your inventory.

3. Hold inventory in components instead of subassemblies

The cost of inventory could be reduced by holding the inventory in raw components instead of circuit boards/subassemblies and manufacturing it on demand.

IV. Conclusion

Inventory could be lowered either by reducing the number of subassemblies or by pooling Type A (standard) components with the outsourced manufacturer. Additionally inventory could be held in raw components instead of subassemblies to reduce the cost of inventory.

Difficult Questions

If the interviewee solves the case very quickly, you can come up with more challenging questions.

Questions on this case
1 Subassembly inventory costs
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Hello Max, A potential answer to your (fair) point is that the same raw material can be used to produce different circuit boards/subassemblies. In that case you have to storage less material, becau... (more)

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