The impact of product variety on logistics performance

We study the impact of product variety on the performance of a simple integrated production-distribution system equivalent to the stochastic economic lot-scheduling problem. We show that, keeping the total demand constant, the expected cost of inventories and backorders increases linearly with the number of products. This result is contrary to the conventional wisdom-based on pooling economies-whereby the expected cost would increase as the square root of the number of products. The linear relationship stems from the increase in replenishment lead time induced by an increase in product variety. In a systematic simulation study we show the phenomenon to be quite robust, as it does not depend on load, flexibility, or processing variability.