Product Variety, Supply Chain Structure, and Firm Performance: Analysis of the U.S. Bicycle Industry

Abstract

U sing data from the U.S. bicycle industry, we examine the relation among product variety, supply chain structure, and firm performance. Variety imposes two types of costs on a supply chain: production costs and market mediation costs. Production costs include, among other costs, the incremental fixed investments associated with providing additional product variants. Market mediation costs arise because of uncertainty in product demand created by variety. In the presence of demand uncertainty, precisely matching supply with demand is difficult. Market mediation costs include the variety-related inventory holding costs, product mark-down costs occurring when supply exceeds demand, and the costs of lost sales occurring when demand exceeds supply. We analyze product variety at the product attribute level, noting that the relative impact of variety on production and market mediation costs depends to a large extent on the attribute underlying the variety. That is, some types of variety incur high production costs and some types of variety incur high market mediation costs. We characterize supply chain structure by the degree to which production facilities are scale-efficient and by the distance of the production facility from the target market. We hypothesize that firms with scale-efficient production (i.e., high-volume firms) will offer types of variety associated with high production costs, and firms with local production will offer types of variety associated with high market mediation costs. This hypothesis implies that there is a coherent way to match product variety with supply chain structure. Empirical results suggest that firms which match supply chain structure to the type of product variety they offer outperform firms which fail to match such choices.

Supply Chain Resilience Analysis: A Brazilian Automotive Case

“…For example, Fisher (1997), Randall and Ulrich (2001), Lee (2002), Qi, Boyer and Zhao (2009) study the relationship between SC structure, product structure and external environment. Berry and Cooper (1999) conclude that flexibility does not always lead to higher profitability; the level of flexibility needs to be aligned with the requirements placed upon the SC.…”

Managing Product Variety and Collocation in a Competitive Environment: An Empirical Investigation of Consumer Electronics Retailing

“…Yet launching and maintaining a large product variety incurs considerable costs, due to higher inventory levels (Kekre 1987), the loss of scale economies, and the imposition of supplychain market mediation (Randall & Ulrich 2001). …”

“…Considerable research has studied why variety might theoretically benefit the firm (e.g., Kahn 1998a, b;Lancaster 1990Lancaster , 1998 and examined empirically the benefits (e.g., Kekre & Srinivasan 1990) and costs of expanding variety (e.g. Randall & Ulrich 2001). However, little research has focused on competition as a key determinant of product variety.…”

The Power of Integrality: Linkages between Product Architecture, Innovation, and Industry Structure

“…Second, while the limited complexity of the product -as compared to computers or jet engines -better allows us to study effects of interest, it is not too limited to allow useful insights. Others have used the related bicycle industry for insightful studies (Randall and Ulrich 2001;Ulrich and Ellison 2005). Finally, despite the significant changes in product architecture and industry composition, this industry exhibited a relatively stable industry boundary during the study period which enables better control for industry-level factors on competition (Dalziel 2005;Jacobides 2005).…”