Assessing the Dimensions of Product Variety on Performance: The Value of Product Line and Pack Size
Author | Xiang Wan,Martin E. Dresner,Philip T. Evers |
Date | 01 September 2014 |
DOI | http://doi.org/10.1111/jbl.12054 |
Published date | 01 September 2014 |
Assessing the Dimensions of Product Variety on Performance:
The Value of Product Line and Pack Size
Xiang Wan
1
, Martin E. Dresner
2
, and Philip T. Evers
2
1
The Ohio State University
2
University of Maryland
This article studies the impacts of product variety along two dimensions: product-line variety and pack-size variety. Previous research has
often found that increased product variety is associated with increased sales. Interestingly, we find that this is not always the case, once
the negative impact of product variety on fill rates is introduced. Specifically, product-line variety has a positive total effect on sales, but pack-
size variety has a negative total effect on sales. We also investigate potential nonlinear impacts (with decreasing marginal effects) of product-
line and pack-size variety, and find the result to be one of diminishing returns.
Keywords: product variety; product line; pack size; fill rates; sales; distributors
INTRODUCTION
Why do firms offer multiple flavors for a particular brand? Why
do companies produce specific products in a range of sizes? The
obvious answer is to meet consumer preferences (Sloot et al.
2006). For example, in the soft drink market, households have
been found to increase their purchases when product variety
increases (Drescher et al. 2006). Based on estimated total house-
hold soft drink expenditures of $65 billion per year, product
variety increases industry revenues by $1.3 billion annually (Tut-
tle 2013). A second answer is to foreclose entry by competitors
into market segments. By providing an ever-increasing variety of
products, first-mover firms can segment a marketplace into thin-
ner “slices,”occupy retail shelf space, and thus decrease the
potential for new entrants (Lancaster 1990). Scherer (1979) finds
that high product variety is an effective strategy employed by
cereal manufacturers to foreclose entry by competitors and
increase their own market shares. This finding explains why, for
example, the U.S. ready-to-eat breakfast cereal industry was
dominated by four firms in the 1970s. Each offered many differ-
ent products appealing to select segments of consumers (e.g.,
young children, healthy eaters, etc.).
There are, however, significant logistics and order fulfillment
complications from product proliferation. As a company’s prod-
uct variety increases, so too do errors in demand forecasting and
information systems (Randall and Ulrich 2001; Ton and Raman
2010), which in turn causes logistics service metrics, such as fill
rates, to decline even as inventory levels increase.
The benefits of product variety on sales and its adverse effects
on fill rates may depend upon how this is employed. Product
variety can be created not only through differences in the
physical form of products offered but also through branding, by
variations in packaging, by the provision of warranties, and
among other things, through aftersales support offered for vari-
ous products (Ramdas 2003). There has been very little work,
however, on how different types of variety impact firm perfor-
mance. Moreover, diminishing marginal returns associated with
increased product variety (Sorenson 2000) may result in nonlin-
ear impacts of different types of product variety. For example,
adding one more product to 100 existing products has less effect
than doing that to 10 existing products.
Considering different types of product variety and their influ-
ences on performance, we extend a study by Wan et al. (2012),
where product variety is measured by the number of stock keeping
units (SKUs) to investigate the nonlinear impacts of two particular
types of product variety—product-line variety and package-size
variety. Product-line variety represents variations in product char-
acteristics such as brand, flavor, or composition; pack-size variety
represents variations in quantities provided in a pack. (As an exam-
ple, a yogurt producer may offer an assortment of products that dif-
fer on the basis of flavor, ingredient, or brand name [product-line
variety] in different numbers of cups per pack [pack-size variety].)
We examine these two types of variety for two important reasons.
First, in many consumer goods industries, product-line variety and
pack-size variety are among the most common ways firms intro-
duce new products. Second, these two variety dimensions are
likely to have very different impacts on operations and sales at dis-
tribution centers. Pack-size variety, in particular, is likely to create
significantly more logistical concerns in warehousing and distribu-
tion than the addition of a new product line. For example, a new
pack size may require new handling and storage procedures,
whereas a new product line may rely upon existing pack sizes.
Furthermore, we delve deeper into understanding how the
impacts of product variety vary across different dimensions, find-
ing that increased product lines and pack sizes do not have con-
sistent performance effects. Our results show that, as expected,
both product-line and pack-size variety have negative effects on
fill rates and positive direct effects on sales. Also as expected,
product-line variety has a positive total effect on sales. Unexpect-
edly, however, pack-size variety has a negative total effect on
sales as the negative indirect effect of pack-size variety on sales
through fill rate dominates the direct positive effect on sales.
Hence, counter to the anticipated impact of product variety in
general, increased pack-size variety can actually hinder sales.
Corresponding author:
Xiang Wan, Fisher College of Business, The Ohio State University,
2100 Neil Ave., Columbus, OH 43210, USA; E-mail: wan.207@
osu.edu
Journal of Business Logistics, 2014, 35(3): 213–224
© Council of Supply Chain Management Professionals
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