More choice for consumers can hurt the bottom line

In the working paper, "Understanding the Behavioral Drivers of Execution Failures in Retail Supply Chains: An Experimental Study Using Virtual Reality," Chicago Booth Adjunct Professor Nicole DeHoratius, together with RWTH Aachen University's Özgür Gürerk and University of Texas' Dorothee Honhon and Kyle Hyndman find that when retailers add products to the shelf that look similar to existing products, execution suffers.

Specifically, employees tasked with sorting, stocking and replenishing items are more likely to make mistakes and take longer to execute simple retail tasks.

The researchers conducted experiments in a virtual reality lab. They asked subjects to sort cubes into one of two bins depending on the objects' characteristics. The researchers tested four treatments: less-similar colors with a label; more-similar colors with a label; less-similar colors without a label; and more-similar colors without a label. Increasing the similarity between two products led to a 23.5 percent decline in efficiency. On average, subjects spent about 20 percent more time inspecting products when they were similar.

The addition of a label, or a visual cue that helped distinguish among like items, was found to mitigate execution failures and improve workflow. Overall, when two products were difficult to distinguish, performance improved 22 percentage points with the addition of a visual cue.

"This research has implications for manufacturers, retailers and packaging design companies looking to improve productivity," said DeHoratius.

As product variety continues to proliferate and SKU-rationalization efforts fail to take hold, better packaging design and labeling of consumer products can help a retailer's bottom line by making it easier for workers to sort, restock and ship products accurately.

The paper can be accessed at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2676628