III. Background and Business Model Costco Costco is consid considere ered d as one of the bigges biggestt global global retail retailers ers that that provid provide e customers with a variety of merchandise, ranging from well known brands to private label items. Costco was established in 1976 under the name “Price Club” which was a store located in a converted airplane hanger in San Diego, and since then it has been operating as a low cost leader, through it’s no frills warehouse business model, which enabled it to become the first company to grow from 0 to $3 billion sales in less than 6 years (Costco 2013). Today, Costco competes intensely for customers and profits with Wal-Mart’s Sam’s Club warehouse model, and Target Corporation’s department store model. Costco Costco starte started d by target targeting ing only only small small busine business sses, es, but then then change changed d to serving also non-business members in 1983. Costco’s operating philosophy is simple, it is “Keep costs down and pass the savings on to our members” (Costco 2013). Costco’s business model depends on quick inventory turnover and high sales volume, this means that supply chain management is an integral part of Costco’s success. The high sales volume was achieved through low prices and the limited number of products offered to customers in term of SKUs compared to other retailers. While the quick inventory turnover was achieved through the agile supply chain Costco built, depending on its tremendous buying power and long term relations with major suppliers. This model relies on the following principles: -
Offe Offerin ring g a limi limite ted d num numbe berr of of ite items ms.. Keeping ing co costs down. Main Mainta tain inin ing g high high sale sales s vol volum ume. e. Paying wo workers we well. Sell Sellin ing g cust custom omer ers s memb member ersh ship ips. s. Target Targeting ing upsca upscale le shoppe shoppers, rs, especi especiall ally y small-b small-busi usines ness s owners. owners. Savi Saving ng cos costs ts by by not not usin using g adv adver ertis tisin ing. g.
Supply chain management plays an important role in the success of this business model, for example the limited number of items (around 4000 per store compared to 10000 for competitors) which are selected and decided upon how much to stock based on an analysis of each item’s ability to sell, allows Costco to have higher sales volumes for each item, thus enabling Costco to gain more bulk discounts from suppliers. This strategy enabled Costco to be the number one warehouse retailer in market share ahead of Wal-Mart’s Sam’s Club (Cascio 2006), as seen in figure-1 below.
Figure-1 US Warehouse Club Market Size (L.E.K Consulting 2010)
In terms of memberships, Costco had 67 million loyal members in 2012, with a member renewal rate of 89.7% in the U.S. and Canada, and 86.4% around the world (Costco Wholesale Corp. Annual Report 2012). Also Costco is ranked as number one among American retailers in customer satisfaction, as per the American Consumer Satisfaction Index (ACSI) of the University of Michigan (Forbes 2011).
IV. Competitive Advantage and Strategy Costco’s main competitive advantage is maintained through its low operating cost structure that was built upon logistics and supply chain management operations that minimise material handling and promote efficient packaging that is designed for large transactions, this enabled Costco to create a hard to replicate and a sustainable competitive advantage (Morris 2004). There are many factors and capabilities that contribute to the success of Costco’s supply chain as a competitive advantage, they include: •
•
•
Large purchases from manufacturers and importers contribute to the supply chain capabilities through reducing cost and increasing Costco’s power. Technical capabilities that Costco uses to create innovative packaging for increasing consumer safety, and increasing the logistics efficiency. Low overhead operations: 24-hour distribution centres, limited manufacturing businesses that produce high quality / low cost
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products, and 617 global warehouses with an average size of 143,000 square feet (Costco 2012). Costco’s return and refund policies that allow customers to return products they don’t like and get a refund without even the need for the receipt, which is enabled by smooth reverse logistics operations. Costco adopted a “best-cost provider” strategy, which is a mix of the following generic strategies, low cost leadership, and differentiation, such strategy is aligned with Costco’s main capabilities, which are purchasing power, high sales volumes, quick inventory turnover, a streamlined supply chain, good supplier relations, and good customer service (Walker 2008). This strategy has three major components, which are limited product selection, low pricing, and what Costco calls “treasure hunt merchandising”, “which are high-end products acquired in closeouts and liquidations” (Walker 2008). This strategy works well with Costco, as it serves the needs of the targeted customers. Costco’s management believes that low price, high value products are precisely what it takes to maintain the power in this industry (Cascio 2006). •
V. Costco Supply Chain Strategy Costco managed to run a highly efficient, agile, and streamlined supply chain to meet the requirements of its business model, the supply chain is agile that Costco could switch its purchases to an alternative manufacturer easily if its current sources of supply became unavailable for any reason. Low cost strategy requires a unique supply chain, continuous improvements to the operational efficiencies, exploiting experience, and redesigning products (Sumer 2012). Costco’s supply chain uses strategies such as cross docking and VMI to reduce costs and minimise inventory levels. Costco buys almost all the items from the manufacturers directly, thus eliminating the costs of the middle man, these purchases are either shipped directly to Costco’s selling warehouses, or to a consolidation point, to combine various shipments to minimise handling and freight costs, this is illustrated in Figure-2 below, the result is that in 2012 Costco’s Inventory turnover was 12.6 times the industry average (Costco 2013). This enabled Costco to meet the needs of business customers at lower costs (Morris 2004).
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Figure-2 Costco’s Distribution Flow Model (Morris 2004)
The cross docking system is an innovation that was created by Wal-Mart, it allows a distribution centre to process incoming shipments through a crossdocking system, where products are sent to a warehouse on a continual basis, this means that they don’t have to sit in inventory for more than 24 hours, which reduces costs (Abbaterusso 2010). Costco’s “warehouse concept” is all about reducing logistics costs, so crossdocking is at the centre of the strategy. The stores’ layout which is similar to a warehouse layout enables Costco to display pallets quantities, which means that almost 75% of the pallets in distribution centres move intact, while the rest are broken down and sorted by case, the result is that pallets spend an average time of 9 hours in a distribution centre, this saves labour costs for picking, packing, and shipping (Sangam 2012). Costco currently uses a postdistribution system, this means that Costco staff attach labels to pallets after receiving them, but future plans are made to make the vendors attach the labels for Costco, to avoid all labour touch at the warehouse and further reduce costs (Sangam 2012). It is also important to mention other factors that contribute to reducing supply chain costs, such as the strict control Costco has over warehouse entrances and exits, which reduced inventory losses to a level below those of competitors (Spencer 2013). Wal-Mart has what is considered by many as the greatest supply chain and distribution network on the planet, but Costco’s momentum of good fortune allows it to outperform its major competitor Sam’s Club (Wal-Mart–owned) in overall and per-store sales (Forbes 2011). V.I Supply Chain Technological Solutions
Costco’s CIF Richard Galanti said in 2008 that Costco’s annual IT budget, which includes supply chain technology, is roughly $50 million Valladolid Page 4 of 7
2008). Part of this budget is invested in a suite of integration services to be used by Costco’s suppliers. Costco selected the leading “Supply Chain Integration Service” supplier “SPS Commerce” to provide a suite of integration services for Costco’s suppliers, this enables Costco to conduct E-Commerce with its suppliers using SPS’s hosted internet service, this technology processes orders electronically, and stores them accurately and quickly, thus reducing shared costs for administrating orders, and improving accountability Valladolid 2008) Costco also implemented solutions from i2 Technologies, in order to achieve higher levels of performance while reducing distribution and transportation costs. The company aims to deliver its products more efficiently across its distribution network. Costco will leverage i2’s Freight Matrix solutions to optimise its North American transportation network leveraging leading edge decision support systems from i2. This means that Costco will collaborate with its carriers to create an innovative transportation procurement process, by using strategic modelling and what-if analysis to allocate the optimal carrier base to specific lane volumes while balancing cost and service level requirements (Valladolid 2008). Costco uses Connection Hub’s Drop-Ship master application suite, this allows Costco to integrate any new supplier into the S.C system. This application allows Costco to maintain a supply chain management system that is efficient and agile without adding new inventory or risk, it acts as a single point of integration and contact with suppliers in an easy way (Valladolid 2008). V.II Costco Online Operations
Costco went online in 1998, when it launched its online store to attract more shoppers by offering unpublicised deals online, the company spokesman Ron Damiani said that "The [site's] big advantage is accessibility to consumers that are further away from our traditional markets, but this also allows us to sell [merchandise] on a 24-hour basis,". "It also enables us to put things on the site for which the volumes are too low to justify putting them into stores, such as jewelry, and single items with a 'wow' factor." Shipping costs will be priced competitively with other Internet retailers, Mr. Damiani said (Shaw 2005). Costco’s online store ranks 17 th among online retailers, while Wal-Mart ranks 4th with faster growing rate than Costco. This shows that other retailers are doing better in the E-Commerce, competitors such as Wal-Mart are putting more efforts into the E-Commerce business, Wal-Mart for example buys social media companies to reach more buyers. Costco’s non-advertisements strategy resulted in the company’s website not appearing in searches, but Costco’s senior vice president of E-Commerce Ginnie Roeglin said that the company is “moving to a new platform that will be structured in a way to be picked up by search engines” (Allison 2012). According to Roeglin, Costco is exploring social media, but without dedicating much money to it, following Costco’s core strategy of keeping costs down (Allison 2012).
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The average online sale is higher than a Costco warehouse, but this kind of sales is distributed among a larger area, this means more pressure to improve the performance of the supply chain to meet these online sales orders where shipping is included in most orders, Costco offers “white-glove delivery”, which means that the assembly of the item is done where the customer selects, and the disposal of the packaging is covered with the service (Allison 2012).
VI. Costco Reverse Logistics Costco has one of the best return policies in the industry, such a policy is made possible by the efficient supply chain Costco built. This policy takes the risk out of purchasing, thus contributes to the high sales volume that is critical to the success of Costco’s business model. In 2007 Costco partnered with Greensight to collect unwanted electronics for dollars on Costco cash card, these items are refurbished then re-sold or disassembled for recycling, which made an important source of income to Costco (Reverse Logistics 2007).
VI. Conclusions Costco is a perfect example of how a company can prosper and succeed depending on using the right supply chain technologies that create an efficient and streamlined supply chain to support the business model and strategy of the company, rather than just being a logistics function. In Costco’s industry, it is important to satisfy customers by being responsive to their needs without having high inventories that eat up profit margins, this is where Costco excelled through building a streamlined supply chain. It is important to mention the role IT plays in facilitating supply chain transparency and information flow, this justifies the huge investments companies make in integrating their supply chains using latest technologies. This report showed how supply chain management if managed efficiently can become a competitive advantage that is hard to imitate by competitors.
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VII. References Abbaterusso, J 2010, “Supply Chain Management at Wal-Mart”, viewed 7/4/2013, http://www.jeremyabbaterusso.com/storage/Supply%20Chain%20Management%20-%20WalMart%20Case.pdf Allison, M 2012, “Left Behind on E-Commerce, Costco Hastens to Catch Up”, The News Tribune, viewed 8/4/2013, http://www.thenewstribune.com/2012/05/13/2143257/left-behind-on-e-commercecostco.html?storylink=rss_xml#storylink=cpy Cascio, W 2006, “Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club”, Academy of Management Perspectives. Condon, J 2012, “Costco growth puts pressure on supply chain”, viewed 6/4/2013, http://www.beefcentral.com/p/news/article/1211 Costco Website 2013, viewed 1/4/2013, http://www.costco.com/membership-information.html Costco Wholesale Corporation Annual Report 2012, viewed 3/4/2013. Forbes 2011, “The Costco Factor: To Win The Business Game, You Need to Change How You Think”, viewed 6/4/2013, http://www.forbes.com/sites/glennllopis/2011/01/31/the-costco-factor-to-win-the-businessgame-you-need-to-change-how-you-think/ Shaw, H 2005, “Costco hits internet with online store: Costco.Ca launches soon”. L.E.K Consulting 2010, “Why Costco and Other Warehouse Club Retailers Matter”, Executive Insights, Volume XII, Issue 5, viewed 8/4/2013. Morris, T 2004, “Understanding Costco”, viewed 8/4/2013, http://www.coriolisresearch.com/pdfs/coriolis_understanding_Costco.pdf Reverse Logistics 2007, “Costco Will Buy Your Electronics”, viewed 6/4/2013, http://www.reverselogisticstrends.com/shownews.php?id=4864 Sangam, V 2012, “Solutions To Avoid Inventory Carrying”, Supply Chain World , viewed 8/4/2013, http://vijaysangamworld.wordpress.com/2012/03/22/solutions-to-avoid-inventory-carrying/ Spencer, J 2013, “Sustainable Solutions Paper: Several Strategic Analyses of Costco Wholesale Corporation”, viewed 6/4/2013, http://josephspencermcdaniel.blogspot.com.au/2013/01/sustainable-solutions-paperseveral.html Sumer, K 2012, “Business Strategies and Gaps in Porter’S Typology: A Literature Review”, Journal of Management Research, ISSN 1941-899X 2012, Vol. 4, No. 3, pp. 105-107. Valladolid, J 2008, “Costco Supply Chain Management”, viewed 8/4/2013, http://team4costco.blogspot.com.au/2008/04/supply-chain-management.html Walker, M 2008, “Costco: A Case Study”, viewed 4/4/2013, http://www.scribd.com/doc/21176050/Costco-A-Case-Study
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