The New York area is full of diners with enormous menus that are not chains. Quality varies highly (and often not correlated with price), but I believe it's mostly made in-house.

It definitely varies, but diners bulk buy most of their stuff from national distributors for sure. Nuggets, fries, burgers, meatloaf, gyro meat, etc.

Made in-house in the sense of thawed and microwaved in-house. I learned quickly to stick with the handful of items that are eaten frequently. Everything else tastes like it came off the assembly line a few months ago.

Just because it's made in-house doesn't mean it's good.

I would have thought it would be the opposite?!

If there are less items I thought that it would make it easier to standardize and ship them in, while a larger menu might require more actual cooking.

Restaurants that focus on quality frequently change the menu, very often following the seasonality of their ingredients (asparagus season, etc).

Same can be seen in high-quality fashion. A new collection every season, comprised of a few well crafted items.

And don't get me wrong, I have no qualms with fast food. I find it just interesting how few have bothered to look behind the curtain given all the cooking shows, books, etc. Bourdain's Kitchen Confidential came out ages ago.

More items means larger learning curve for actual cooking. If you make 5 things then you can quickly and cheaply teach someone to do that well, make 500 things and that's not going to happen. With a large menu each step must be simple and easy to follow based on step by step instructions.