Product variety, sourcing complexity, and the bottleneck of coordination
| Author | Xiang Wan,Yue M. Zhou |
| Date | 01 August 2017 |
| Published date | 01 August 2017 |
| DOI | http://doi.org/10.1002/smj.2619 |
Strategic Management Journal
Strat. Mgmt. J.,38: 1569–1587 (2017)
Published online EarlyView 3 January 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2619
Received 4 March 2016;Final revisionreceived 20 October 2016
PRODUCT VARIETY, SOURCING COMPLEXITY,
AND THE BOTTLENECK OF COORDINATION
YUE M. ZHOU1*and XIANG WAN2
1Strategy Department, Stephen M. Ross School of Business, University of Michigan,
Ann Arbor, Michigan, U.S.A.
2Marketing and Logistics Department, Fisher College of Business, Ohio State
University, Columbus, Ohio, U.S.A.
Research summary:This paper studies the coordination burden for rms that pursue variety
as their main product strategy. We propose that product variety magnies the tension between
scale economies in production and scope economies in distribution, giving rise to complex
sourcing relationships. Sourcing complexity worsens performance and poses a dilemma for
organization design: A hierarchical structure with intermediate coordinating units such as
sourcing hubs reduces sourcing complexity for downstream distribution but creates bottlenecks
at the hubs, hurting performance for both the hubs and downstream distribution. We empirically
examine operations data for about 300 distribution centers within a major soft drink bottling
company in 2010– 2011. Results support our hypotheses, illuminating the source of complexity
in multi-product rms and the challenge for organization design in managingcomplexity.
Managerial summary:This paper uses data for about 300 distribution centers within a major soft
drink bottling company to study how a large product variety createscomplex sourcing networks.
We nd that, in addition to poor performance (e.g., increased stockouts), complex sourcing
networks can cause challenges for organization design. In particular, the benets of converting
an existing distribution center into a sourcing hub (i.e., reduction in sourcing complexity for
downstream distribution) and the costs of doing so (i.e., reduction in performance for both the
hubs and downstream distribution)are both real and signicant. The design of an efcient sourcing
network despite its complexity involves important managerial decisions. Experiences in building
and managing such networks can be the basis of a dynamic capability. © 2016 The Authors.
Strategic Management Journal published by John Wiley & Sons Ltd.
INTRODUCTION
Complex systems, or systems with a large number
of interdependent relationships, have been a sub-
ject of intense managerial research over the last
two decades. In particular, the business rm has
been viewed as a complex system that transfers
Keywords: product variety; complexity; coordination; bot-
tleneck; organization design; stockouts
*Correspondence to: Yue M. Zhou. Stephen M. Ross School of
Business, University of Michigan, 701 TappanStreet, Ann Arbor,
MI 48109, U.S.A. E-mail: ymz@umich.edu
© 2016 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License,
which permits use and distribution in any medium, provided the original work is properly cited, the use is
non-commercial and no modications or adaptations are made.
information, materials, and energy between tasks
(Baldwin, 2008). The costs of coordinating a
complex system reduce rms’ synergistic benets
from diversifying into related businesses (Zhou,
2011), including new product varieties, and cause
problems for organization design (Siggelkow and
Rivkin, 2005; Zhou, 2013).
Three gaps exist in this literature. First, despite
the large number of studies on the consequences of
complexity, the presence of complexity is mostly
assumed rather than theorized. We knowlittle about
how complex relationships emerge in real organi-
zations. Identifying potential sources of complexity
1570 Y. M. Zhou and X. Wan
in real business rms will help us to pinpoint the loci
of coordination, as well as to reevaluate strategies
that cause complexity in the rst place. Secondly,
studies of organization design to manage complex-
ity mostly focus on the extremes of modularity
vs. integration or centralization vs. decentraliza-
tion; the design of intermediate coordinating units
within a multilevel hierarchy (e.g., departments
managing divisions) has been overlooked. Because
these intermediate coordinating units enable rms
to grow from both specialization and synergistic
benets (Zhou, 2013), they contribute to rms’
dynamic capability and deserve a closer exami-
nation. Thirdly, the various conceptualizations of
complexity and its costs are difcult to measure
using empirical data. Most prior work keeps the
concept at an abstract level using NK models and
relies on computer simulations (e.g., Burton and
Obel, 1980; Levinthal, 1997; Rivkin, 2000) or case
studies (Siggelkow, 2001) for analysis. The number
of econometric studies is small.
Against this background, our paper investigates
the emergence of a particular type of complexity:
the complexity that pertains to inter-unit sourcing
networks— what we call “sourcing complexity.”
We rst build a theory of sourcing complexity,
arguing that the tradeoff between economies of
scope and scale creates sourcing complexity for
rms that pursue variety as their main product
strategy. On the one hand, pursuing economies of
scope requires rms to distribute multiple varieties
to the same customer through shared marketing and
delivery channels. On the other hand, achieving
economies of scale requires decreasing variety at
the plant level. For instance, it is generally cheaper
for a plant to produce one variety of cereal for
markets across the Eastern seaboard as opposed to
producing many varieties of cereal for New Jersey
alone. Specializing distribution by customer order
to maximize economies of scope while specializing
production by variety to maximize economies
of scale causes sourcing complexity between
production units (e.g., plants) and distribution units
(e.g., distribution centers or DCs).
We then analyze the consequences of sourcing
complexity for performance and organization
design, respectively. We argue that sourcing com-
plexity worsens performance by imposing extra
coordination burdens on organization units. For
example, plants and DCs have to coordinate for the
order, execution, and conrmation of shipments,
for the scheduling of production according to
idiosyncratic demand at the DCs, and for the
appraisal of product specications. While some
elements of these tasks can be centralized, each
pair of units in a sourcing relationship has its own
contingencies that need to be coordinated. Failure
to communicate, to appraise interactions, or to
correct decision errors will cause delays and a
poor synchronization of tasks, such as a mismatch
between supply and demand. A mismatch of this
type could result in a stockout, where a customer
order is not completely fullled due to insufcient
supply. Frequent stockouts result in customer
dissatisfaction and ultimately hurt sales, protabil-
ity, and future demand; it is therefore a frequent
subject and important performance measure in the
product-variety literature (Anderson, Fitzsimons,
and Simester, 2006; Musalem et al., 2010).
In addition, sourcing complexity presents chal-
lenges for organization design. In particular, we
argue that a hierarchical structure can reduce
sourcing complexity by allowing plants to ship
to a small number of intermediate coordination
units– sourcing hubs, which then consolidate
shipments and forward them to DCs. However,
a hierarchical structure also creates coordination
burdens for the sourcing hubs, which have to coor-
dinate both inward and outward linkages. As an
increasing number of shipments pass through hubs,
those hubs can become bottlenecks, cascading
worsened performance to their downstream DCs.
We propose four hypotheses based on these
arguments: (1) In the presence of economies of
scale in production, product variety increases
sourcing complexity; (2) Sourcing complexity
worsens coordination performance; (3) Controlling
for sourcing complexity, DCs experience worse
coordination performance when they also serve as
sourcing hubs; and (4) Controlling for sourcing
complexity, DCs experience worse coordination
performance when they source through hubs.
We empirically test these hypotheses in the con-
text of the soft drink industry, where the two dom-
inant concentrate manufacturers (CMs), Coca-Cola
and Pepsi, compete ercely on product variety and
service level, including low stockout rates. Bottling
processes are capital-intensive, production lines
are subject to high switching costs and therefore
most efcient when producing only a few varieties,
while sales are driven by variety assortment and
direct-store delivery. As a result, consistent with
our theory, managers must trade off economies of
scale in production against economies of scope in
© 2016 The Authors. Strategic Management Journalpublished by John Wiley & Sons Ltd. Strat. Mgmt. J.,38: 1569–1587 (2017)
DOI: 10.1002/smj
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