The Bottleneck: Product Variety and Coordination Failures at A Major Soft Drink Bottling Company

Abstract

This paper studies the coordination challenges facing firms that pursue variety as their main product strategy. We propose that product variety magnifies the tension between scale economy in production and scope economy in distribution. As a result, firms with greater variety are more prone to coordination problems between production and distribution due to extensive sourcing relationships among plants and distribution centers (DCs). To test these hypotheses, we empirically examine sourcing and operational performance across about 300 DCs within a major soft drink bottling company in 2008–2011. We find that DCs carrying a larger variety of products tend to source from a larger number of other units (DCs or plants). In addition, DCs that source from more units experience a higher level of stockouts, where customer orders are not completely filled. We also exploit a change in organization structure to examine the impact of integration on coordination. We find that integration reduces stockouts. These results suggest that the pursuit of scale economy in upstream production and the pursuit of scope economy in downstream distribution create interdependencies and, consequently, coordination challenges.