1. Executive Summary
Costco Wholesale Corporation founded in 1983 by Jim Sinegal in Seatle Washington with a vision & mission “to continually provide members with quality of goods and services at the lowest possible price control inventory.” Part of their strategy include direct buying relationship that ensures an efficient & strong SC management, high standard staffing plans, high quality products at lower prices and assessable to members who are considered more loyal. Efforts are made to develop strategic options in line with these strategies while focusing on the supply chain parameters that span from order placement to receipt of goods at the warehouse and made available to customers in the warehouse shop floor using the most cost effective processes in order to ensure they support the mission of the company.
By assessing Costco’s external opportunities and threats as well as the internal strengths and weaknesses (using SWOT & Porter’s Five Forces analysis), one can infer they are doing well within their industry. More options were generated to increase sales and awareness of the retail warehouses. The report concludes with recommendations for Costco to sustain it’s market edge and advance by expanding into the European & Asian markets more as their presence is still very weak in these regions as well as add other services & goods to their already existing list.
2. Introduction Costco Wholesale Corporation founded in 1983 within the retail industry is the largest warehouse club in the world based on sales volume. A major wholesale business offering three levels of membership and the largest wholesale club operator in the US with membership/warehouse locations spread across Asia, Europe, North & South America with headquarters based in Washington, US. Their main competitors operating membership warehouses include Sam’s Club & BJ’s wholesale club. Jim Sinegal, the founder defines the company vision as “giving the best to the customer at the best value possible”. Here best value (in quality of goods & services offered) at low prices are the driving force. Costco backs up it’s products with a return policy within a time frame of average 90 days, a highly endearing attraction to it’s members.
The business model focuses on low prices & volume purchase in order to achieve profit at low margin with stores offering discounts on an average of 4,000 products out of which roughly a thousand are ‘treasure hunt’ referring to goods that are scarcely available for purchase always. Volume purchase from few vendors yielding further reduction in price and lowers cost in marketing. With low prices, quality goods in limited selection based on forecast lead to quick turnover in inventory. The high volume purchase and efficient network distribution yield efficiency in operations for Costco. With a stipulated membership fee, Costco warehouses are designed to help small to medium size businesses reduce purchasing costs as well as serving large families with the goods packaged in bulk ranging from alcoholic beverages, electronics, fresh food/produce, household & office supplies, pharmaceuticals & tires. Also available are special memberships with services like car & home insurance, mortgage and real estate services, and packages for travels.
3.Purpose and Main Areas Of the Research (Concepts & Techniques) Analyzing the supply chain operations at Costco wholesales, in line with the business focus while limiting to it’s supply chain operations strategy for maintaining a competitive edge as it relates to SC operations (from sourcing to arrival on pallets and or display at their various warehouses racks), their challenges and options for improvement will be the focus of this report.
The following issues will form questions that will give a frame for this report: • What are the key issues facing Costco in line with (efficient) Supply Chain Operations? • What would be options to compete with these issues? • Which options best suits the business focus and would yield better growth financially?
The sections thereafter will consider trying to answer the questions above by applying SWOT analysis (see appendix 1) and Porter’s five forces framework (see appendix 2). Areas needing improvement will be obvious from such, options that would generate better performance after localizing issues peculiar to Costco. These would ultimately lead to clear recommendations for Costco’s improvement.
Due to inaccessibility of authentic and current data for successive years on sales, further analysis could not be carried out to compare Costco for accurate sales assessment in the last three years or compare with the other two leading club wholesalers (Sam’s & BJs).
Identifying, analyzing key parameters with Supply chain operations processes at Costco and suggest areas of possible improvement.
Inventory Management: Since good are moved straight to the selling floor and inventory is not held by Costco but managed by vendors, inventory & labor cost of handling is avoided. In their meat & grocery section for instance, they focus on low-price & high volume strategies hence, Costco carry very limited amounts of grocery & perishables whereas Wal-Mart is known to have weakness in the area of perishables (Petrak, 2006)
Partnership/Collaboration with suppliers: Costco has buying relationships with many producers of national brands and are supplied directly from suppliers routing to the warehouses of docking points that serve as distribution points. Partnership market is an attribute of Costco, for instance by partnering with American Express to create a Costco-AMEX credit card, discounts & cash cards as offered to customers while Costco markets Amex cards, thereby helping them to acquire more customers.
Distribution Strategies/Transportation: The redesign of product packages to fit into pallets and thereby maximize space has led to reduction of trucks used to transport goods. Cross-docking of goods by delivering directly to Costco stores while some are kept in the distribution centers saves a lot of time & cost along the SC. Utilization of buzzers for truck drives at delivery points to indicate when trucks have been unloaded can save time as against the truck driver’s physical movement within the warehouse is a time saver. Their warehouses are not situated on prime locations hence cost is saved from unnecessary high property cost; again, they own over 80% of the warehouses.
Green Logistics: Costco Kirkland signature has launched eco friendly cleaning products. It maximizes the use of solar power in it’s warehouses, it’s delivery trucks are better packaged to allow maximization of space so as to reduce fleets of transportation and hence environmental pollution. Energy is better conserved with timed lighting and construction of warehouses that can maximize skylight during the day. Food products are packaged in recyclable and more environmentally friendly materials. Customers are paid to recycle their old electronics at the green sight.
Information Technology: This retailer prides itself in it’s connection of all warehouses to the headquarters in Washington. By using the EFIM which provides real time information, manages control systems and inventory management system. The ECR is used to achieve profitability, improvement in efficiency, logistics, procurement and overall cost control. Kumar (2008) records that approximately $6 billion in a year is lost in the USA by supermarkets due to out of stock products among 25 top retailers as a result of inefficiency in their logistics.
Vertical Integration: Costco practices a partial vertical integration with it’s cross-dock distribution. By gaining control of either its inputs or its outputs or both in sourcing directly from suppliers they have more control over innovation & delivery of those services. Cost is also reduced which is ultimately transferred to customers.
Further optimization of operational performance through SC operations options that can sustain a competitive edge and improve customer satisfaction through service improvement and cost reduction.
4. Description Of The Separate Areas 4.1Description of The SC Operations Performance & Improvement. The measurement of SC performance can be based on profit, customer service or sales maximization (Chow, 1994). While the traditional method majorly measured product costs, identification of costs related to customer service is key. Elimination of various extraneous costs like plastic shopping bags, fewer shop floor staff, limited product variety & brands on shelf and also slowing down on capital expenditure like expansion, Costco has been able to focus on improving buying power for achieving greater output. Since inventory rates are quickly turned over, payments to suppliers is fast tracked hence they are able to benefit from discounted early payments. Cost is involved in sourcing products from suppliers, shipment to depots & warehouses, distribution to warehouses & storage in inventory.
By considering the concept of avoidable cost (possibly considering packaging & storage), efforts can be made to improve on SC performance by implementing better SC integration program. Partnering with more suppliers and or service providers for better flow of operations as well as building keener competition can enhance better efficiency leading to more profit in the long run. More side business services can be added at Costco like money order and cash transfers to attract more customers and make Costco a one stop store. Aside from email messages being sent to existing members on promotions, greater awareness can create a more organized means to lure more customers on the expanding array of products & services such that new & more revenue streams are attained.
4.2 Issues Affecting Supply Chain and Possible Solutions Analysis of SC at Costco using SWOT analysis (appendix 1) reveals Costco is doing really well. Growth opportunities exist for business by entering the European & Asian markets as these have not been exploited. From present methods of operations, the high staff salary and low margins maintenance amongst other issues need to be looked into for future prospects. The aging and close exit of the CEO along with growing competition and other threats in intended foreign markets such as political and religious wars, foreign exchange & bank issues are threats to consider.
In dealing with these issues, it will be important to assess briefly lead time management, product handling, transportation, quality, inventory as well as possible process solutions. Where possible, promotions should be done to enhance more sales though with the low prices and already highlighted low margin & high employee, this may eat into the profitability but if well planned can create more publicity for the company which can yield quick inventory turnover. Since low overhead & tight operation is the practice, better savings can be passed on to customers in form of promotion or otherwise.
Exploration of overseas market is still a strong force and will yield greater profit considering the existing reputation Costco has and understudying how business is executed in such regions. Development of more private labels on wider product range and increased focus on customer loyalty programs are worth considering as well. It is advisable the board of management put in place a business plan before the exit/retirement of the CEO.
Porter’s Five Forces analysis (see appendix 2) could identify an overall attractive industry, with the following power and threat situation: The buyer power was determined to have a positive potential impact on Costco business as it portray that buyers have the requisite level of expendable incomes to provide effective demand for goods & services. In a similar manner, low threat of new entrants and substitute products portray an attractive industry whereas moderate internal rivalry and supplier power have a positive impact on Costco operations as it kept the company alert and devoid of complacency.
4.3 Analyzing The Contribution Of SCOM to Competitive Business Performance To further highlight the role of SCOM in enhancing business performance and maintaining a competitive edge, a few activities like volume purchasing, efficient packaging & distribution, supplier integration & customer integration have contributed to give a close picture of Costco capabilities and business level performance with each activity having unique benefits and detriments. Again, constant review of SCM practices may further help management in Costco to further match demand with SC requirements like efficient, lean SC (Cook et al , 2011). Their Network design, JIT resource planning distribution, optimization of transport & replenishment policies have impacted positively and should be subject to constant review for sustaining a competitive edge.
Finally, it is believed that some useful contributions are being developed to improve supply chain and it’s operation in line with the objective of Costco in delivering quality at lowest cost to customers on time with the aim of sustaining a more competitive advantage. Some useful SC options have been suggested above which support these objectives. While the ultimate goal remains to sustainably increase market share by achieving more qualitative growth and at the same time expand on the earning base through exploitation of the European market and already existing markets, Mascarehas et al (2004) adds that “competitive advantage must be won again and again” in other words, giving the current ever changing business world we live in, customer tastes and priorities are changing hence the need for Costco to be better positioned in order to respond always to it’s members needs while expanding on new fronts.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 6 January 2017
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