Providing higher levels of product variety has long been shown to generate increased revenues for both retail and manufacturing firms. However, recent research has also shown that higher levels of product variety can have a negative impact on firm operational performance. This dissertation is a two essay study using archival data provided by a single retail firm based in Shanghai, China, on the effects of product variety on retailer inventory levels, stock out rates, and sales. The first essay examines how product variety, as measured by the number of SKUs carried in the retailer’s product category assortment, affects inventory levels, stock out rates, and sales. The second essay investigates whether different types of product variety (namely brands, sizes, and product lines) impacts store inventory levels, stock out rates, and sales differently.

The first essay investigates how the size of the product assortment impacts inventory levels, stock out rates, and sales.  Greater product variety has the potential to generate higher revenue for the retailer, but also brings the potential for more complications in inventory and supply chain management processes.  While previous research has examined this relationship within a manufacturing context, no research has investigated the tradeoff in a retail context.  Also, this research is the first to consider the impact of product variety on a firm’s inventory levels. This is an important inclusion as inventory levels directly impact the stock out rate of a retailer.  Furthermore, this paper investigates whether characteristics of a product category, such as the hedonic or utilitarian nature of the product category, moderate the relationship between product variety, operational performance, and sales.  Using simultaneous equations and a three stage least squares regression methodology, results suggest that product variety has a positive relationship with inventory levels, stock out rates, and sales.  Finally, the relationship between a product categories’ stock out rate and sales is stronger for hedonic product categories than utilitarian product categories.

In the second essay, this dissertation examines whether the relationship between product variety, inventory levels, stock out rates and sales differs between different types of product variety.  In particular, this essay investigates whether brand variety has a larger impact on retailer inventory levels, stock out rates, and sales than do size variety or product line variety.  Again, using a simultaneous equation model and a three stage least squares methodology, the results suggest that brand variety is associated with higher inventory levels, lower stock out rates and higher sales than size or product line variety in the retail context.