On the validity and practical relevance of a measure for structural complexity

Empirical testimonies indicate that product variety, as well as multimarket and multichannel strategies, can increase a company's sales and, thus, its market performance. However, practitioners and scholars also agree that when those actions are deployed in slow growing markets, the resulting proliferation of products, markets, and channels may erode profits. This is a phenomenon sometimes labelled by practitioners as "the complexity crisis". The literature does not provide a simple and direct measure for variety-induced supply chain complexity that reflects the potentially negative relation between complexity and profitability. Based on the concept of structural complexity in the supply chain that links it to the proliferation of products, markets, and channels, this work assesses the capability of a proposed measure for structural complexity, referred to as pars-Complexity, to capture this relationship. We computed the pars-Complexity of 27 business units of a multinational company and used the obtained values to assess the theoretical relationship between supply chain structural complexity and the company's financial performance. The results indicate that the pars-Complexity measure captures the theoretical relationship between structural complexity and performance, shedding light on its empirical validity. In particular, we find that business units with low values of pars-complexity notably outperform those with higher figures in terms of pre-tax margin. This measure could be applied to companies of manufacturing industries such as food processing, automotive, cosmetics, and fashion or service sector, for instance, healthcare. In addition, the practical relevance of the measure is highlighted with evidence on its potential use as an aid for fixed-costs allocation.