Product variety, supply chain structure, and firm performance: Analysis of the US bicycle industry

Using data from the US 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.