The Supply Chain Efficiency of Costco - Case Study Example

Costco Wholesale Corporation: Supply Chain Management Introduction Costco Wholesale Corporation is a US based membership warehouse club founded by James D. Sinegal and Jeffrey H. Brotman in 1983. The company operates in the retail industry and is headquartered at Seattle, Washington, United States. Costco is the third largest retailer in the world and the second largest in the United States as of 2014. The company offers a wide range of merchandise to its customers. As Johnson reports in his article, the firm’s broader product line includes food items like meat, diary, seafood, and fresh baked goods, computer software, home electronics, home appliances, solar panels, clothing, flowers, books, vacuums, art, tires, jewelry, hot tubs, fine wine, furniture and caskets (‘Costco tests..’). In addition, the company offers a number of services including online shopping, Costco travel, Costco connection, and food service to its customers. The company has a great reputation for keeping operating expenses very low and which in turn could be attributed to its efficient supply chain model. According to Wulfraat, the secret to Costco’s supply chain success is ‘the concept of eliminating fingerprints on the product’. In addition, the organization operates a mix of distribution facilities with intent to achieve its key objective of operating with an efficient supply chain. The cross dock distribution (depot) facility is another major component contributing to the firm’s supply chain efficiency (The secret to Costco’s success.). A deep investigation into the supply chain efficiency of the Costco makes it clear that the company exemplifies the demand-driven ideal for today’s supply chain. This paper will discuss why Costco is considered among the world’s best-in-class in terms of supply chain efficiency. Supply Management/ Supply Chain Arguably, Costco is one among the world’s top 25 supply chains with a greater efficiency in purchasing management, supplier relationships, and strategic sourcing. In the words of Wulfraat, “Costco purchases the majority of their merchandise directly from manufacturers and routes it through a network of cross-docking facilities which act as vendor consolidation points to move goods in full truckload volumes to the stores” (Wulfraat, “The secret to Costco’s success”). Manufactures direct truckload or container-based shipments to depots. Subsequently goods are allocated and shipped to stores within a timeframe of less than 24 hours. Goods are moved in full pallet quantities through the depot to avoid human fingerprints on the product to the greatest extent possible. Here, a forklift manages the movement of a full pallet of merchandise at both receiving and shipping points thereby eliminating the involvement of manual labor. Although this approach is not possible in case of high money value items with low movement, it gives particular emphasis to minimizing touches. Forklifts are again used to move pallets into racks at the warehouse stores meaning that a product is physically touched first is when the consumer comes to pick the item from the rack to put it into their cart. Hence for most of the items being sold at Costco, an employee touches a product first time at the cash register. The major intention of this strategy is to eliminate/minimize the number of human touches on a product between the source of supply and the store shelf. According to the Costco management, the more human touches on the box, the more money is spent to move the box to the store shelf. It is interesting to see that the organization has developed a unique purchasing strategy called ‘treasure hunt’ to improve its sales. Under this approach, the company tries to keep its customers engaged by providing them with new items and tempting deals spontaneously. Similarly, Costco gives specific emphasis to supplier relationships with intent to keep strong business alliances with suppliers in the long term and thereby enjoy competitive operational advantages. The strong supplier relationships assist the organization to offer high quality but low cost products to its customers. The company’s code of ethics clearly emphasizes the need of respecting vendors. Costco hosts Supplier Day every year with the purpose of building and fostering relationships with its key suppliers in the long term (Colleagues Success Foundation). Costco generally performs an in-depth analysis if there is any suggestion to terminate the relationship with a supplier. The firm’s top management is watchful to make sure that they do not terminate a vendor relationship without providing a valid consideration (Retail Touch Points). Since Costco is a company with a solid financial base, it can pay its suppliers promptly, which is something many other businesses are struggling to do nowadays. The company also performs better with regard to strategic outsourcing, which is often defined as an institutional procurement process that focuses on the continuous improvement and re-evaluation of a company’s purchasing activities. The company has developed a potential business network to gather all the necessary information relating to its supply chain on time, and hence meet consumer demands in a more effective way. The Costco management gives particular emphasis to the re-evaluation of its purchasing activities so as to know the current pitfalls and to introduce improved strategies to overcome the shortcomings. Operations The Costco management strongly believes that collaborative planning is vital to make well informed and sound decisions, and to promote the overall performance the organization. For this, Costco encourages its suppliers, employees, and customers to provide the company with timely feedbacks concerning its supply chain activities. The firm promotes active stakeholder involvement in its supply chain planning in order to direct the firm’s supply chain operations in a way that would meet the interests of all stakeholder groups. Evidences suggest that effective collaborative planning has assisted the company to become the world’s third largest retailer within a relatively short period of 30 years. The effectiveness of the inventory management lies in balancing the cost of inventory in stock with the costs of stocking out. It is interesting to note that Costco has almost perfectly achieved this balance. The relatively low number of unique items in the store greatly benefited the company survive the recent recession successfully. The organization shares its inventory and sales data with its brand suppliers, who in turn are responsible for stocking the product on company shelves. Here suppliers accurately replenish the stock at stores, and this ‘vendor-managed inventory’ approach eliminates the possibility of a Bullwhip effect. Under the Costco-supplier relationship, suppliers are also incentivized to reorder and replenish appropriate inventory levels at the stores. As a result, demand forecasting is not a difficult task for the Costco management. The organization keeps update its Facebook and Twitter pages regularly so as to interact with its stakeholder groups and plan for future market demand effectively. The Costco management always considers consumer feedbacks seriously and takes timely measures to avoid the situations of under-stock and over-stock. The company also uses various market research techniques to be in line with the fast changing market environment. Furthermore, Costco has established a reliable system to keep adequate levels of products on its shelves. Growing from only one store in 1983 to more than 600 stores spread across nine countries in 2013, the Costco management has plans to double the number of stores by 2025. Like other leading corporate enterprises, Costco has been relying on in-house ingenuity over the years to develop systems and software the company needed. Identifying the potentiality of this approach, the company management aims to enhance continuous improvement in systems that would contribute to scalability and other global capabilities. The organization initiated the Cosmos project in 2012 in an effort to integrate finance and HR/payroll systems with the support of an Enterprise Resource Planning (ERP) solution. While evaluating the supply chain processes at Costco, it seems that the company gives specific emphasis to effective process management in order to ensure smooth and uninterrupted flow of goods from suppliers to customers. First, suppliers deliver goods to company warehouses, and these are later moved to Costco Depots in accordance with actual demand. In Costco Depots, customers are free to pick the products they need and put them on their cart. The Costco uses ConnectionHub’s Drop-Ship Master application suite in order to integrate new suppliers into their system rapidly, and this facility in turn promotes rapid orders based on Costco requirements (Highbeam business). Logistics & distribution The Costco has developed a broad network to enhance its logistics and distribution operations and currently the firm has a set of competitive advantages over its market rivals in terms of domestic and international logistics. The organization always keeps a two week inventory for high demand products and replenishes the stock effectively. The company’s logistics management is committed to comply with its lead time of one week strictly. The vendor-managed inventory approach really assists the company to contribute significantly to its logistics management efficiency and to cut down labor costs notably. Costco’s logistics operations are based on a new technique called ‘cross docking’ under which most of the company’s inventory is kept in distribution centers and the remaining items are delivered to Costco stores directly. When it comes to global location management, it seems that the company has a presence in four continents including North America, Europe, Asia, and Australia. Expanding from only one store in Seattle in 1983 to a total of 657 locations as of 2013 is really a great achievement for the organization. These 657 locations are spread over nine countries including United Kingdom, Australia, Canada, Mexico, Taiwan, South Korea, Japan, Spain and the United States. Costco operates most of its retail outlets (451) in the United States, 87 in Canada, 33 in Mexico, and 25 in UK (Grocery News). Hence, it is clear that the company focuses largely on its North American market, and it does not have a strong presence in any other country except UK. Similarly, the organization has greater competencies in customer relationship management. The organization always strives to meet the changing demands and expectations of its customers by seeking timely customer feedbacks and promoting customer engagement in the business. Last year the organization launched a program to boost customer engagement with digital advertising. “Costco Wholesale Corporation is using embedded, transparent digital watermarks in consumer editorial and advertising content to deliver a print-to-mobile experience to 8.6 million members” (RM Staff Writer). Readers, using their mobile devices, can access product details and other store information and purchase items by scanning up to 50 digital watermarks throughout the Costco Connection magazine (Retail Touch Points). This innovative technology gives customers a great shopping experience and keeps them loyal to the organization. In addition, Costco maintains comprehensive facilities to answer customer queries and respond to customer complaints. Costco’s customer care executives attend customer problems through phone calls, emails, and social networks. In the opinion of Wisner, Tan, and Leong, the four primary pillars of concern in service response logistics include “management of service capacity, waiting times, distribution channels, and service quality” (p.na). The Costco management is even willing to compromise its profits so as to maintain the quality of the service it delivers. Similarly, the company maintains better waiting times when compared to its market competitors to meet the needs of customers timely. Finally, the Costco has comprehensive distribution channels to ensure timely and proper delivery of goods/services to the end customers. Sustainability Costco has launched numerous initiatives and programs aimed at achieving business and environmental sustainability. It seems that the organization is always committed to preserve nature and the biodiversity. In 2010, the Mercy for Animals conducted an undercover investigation at Buckeye Veal Farm, who is a veal supplier to Costco. In response to the situation, Costco adopted some policy measures restricting its purchases from veal producers that use the crate-and-chain production method, immediately following the investigation announcement. Similarly, the Mercy for Animals conducted another undercover investigation at a pork supplier to Costco in 2012. Even before the public declaration of this investigation, Costco announced its plans to demand their pork suppliers to phase out gestation crates. In addition, the company is always committed to promoting the welfare of its employees because the Costco management believes that a loyal workforce is inevitable for the organization to achieve its long term goals and objectives. Jones states that over 85% of the Costco employees have health insurance in the United States as compared to less than half at competing firms such as Walmart and Target (566). Such socially responsible business strategies have greatly assisted the company to gain greater public acceptance and enhanced reputation in the corporate world. Many reputed surveys have placed the Costco in a better position over Walmart in terms of corporate social responsibility (CSR) efficiency. Industry analysts observe that Costco employees are well paid and the company charges its products low although it sometimes fails to make enough profit to satisfy stockholders. The concept of CSR is given considerable priority in Costco’s annual report. In order to support its CSR initiatives, the company operates a Corporate Sustainability and Energy Group, and it has also launched a greenhouse gas reduction program (Annual report 2013). Use of non-chemical water treatment systems, eighty percent recycled steel materials for construction activities, solar energy systems at 63 facilities, and silver level LEED stand for building warehouses constitutes some of the initiatives taken by Costco towards the achievement of environmental sustainability. In addition, the company gives increased focus to developing more efficient recycling systems, using energy saving LED and HID lights, and eliminating the use of PVC (polyvinyl chloride) in packaging. Although all these efforts are great to promote environmental sustainability, the Costco management still believes that more steps need to be taken for achieving the status of a sustainable corporation. However, recently a lawsuit was filed against the company for discriminating female employees who sought general manager positions. In Costco’s organizational culture, male employees are promoted earlier than their female counterparts with similar qualifications, and women are rarely rotated into management training positions that the Costco’s top management thinks is essential for promotion. Although the female employees tried to get the Costco’s promotion policies changed without a lawsuit, the company was not willing to change them, and the situation resulted in further legal proceedings. In addition, the company paid 3.6 million dollars a few years ago for settling a lawsuit in California relating to its employees’ careless disposal of hazardous materials. This lawsuit clearly reflects how some irresponsible employees may act against the corporation’s environmental policies and hurt its corporate stature. Conclusion From the above discussion, it is clear that the greater supply chain efficiency has benefited the Costco to grow internationally within a relatively short period of 30 years. The company follows a vendor-managed inventory approach to deal with inventory management effectively and thereby avoids the situations of under-stock and over-stock and to trim down labor costs. As part of this strategy, the organization gives particular emphasis to building and maintaining strong relationships with suppliers in the long term. In addition, Costco increasingly focuses on customer relationship management to keep customers satisfied in Costco products and services, and hence build up a potential customer base. Today, Costco operates internationally and it maintains 657retail outlets across nine countries. The company has plans to double this number of retail locations by 2025. Considering the efficiency of Costco’s domestic and international logistics operations, the concern is most likely to achieve its global expansion goals within the timeframe stated. The organization performs outstandingly in terms of corporate social responsibility despite a few CSR-related lawsuits against the company last years. Therefore, the company has a prosperous future, and its frequent innovations in supply chain make the company the demand-driven ideal for today’s supply chain and one among the best-in-class. Works Cited Annual report 2013. ‘Costco Wholesale Corporation’, Sept 1, 2013. Web. Colleagues Success Foundation. ‘What is the Supplier Day?’. Web 29 Oct 2014. http://www.collegesuccessfoundation.org/page.aspx?pid=1151 Grocery News. ‘Costco Wholesale Results (earnings,fiscal,quarterly,reports,2014)’. GN.org. 03 September 2014. Web 29 Oct 2014. http://grocerynews.org/grocers/costco-wholesale-results-fiscal-quarterly-reports-revenue-locations-2013 Highbeam Business. ‘CommerceHub and Costco Extend Relationship for Supply Chain Support; Leading Retailer Leverages Drop-Ship Master Suite to Streamline Fulfillment of Online Orders’. August 1, 2005. Web 29 Oct 2014. http://business.highbeam.com/436102/article-1G1-134659381/commercehub-and-costco-extend-relationship-supply-chain Johnson, Kim. ‘Costco tests Farragut waters’. Farragut Press, Thu, May, 19, 2011. Web 29 Oct 2014 http://mgi.farragutpress.com/articles/2011/05/14191.html Jones, Gareth R and George Jennifer M. Contemporary Management. NY: Tata McGraw-Hill Education, 2008. Print. RM Staff Writer. ‘Costco Wholesale’. RetailMerchandiser. Web 29 Oct 2014 http://www.retail-merchandiser.com/index.php/featured-reports/511-costco-wholesale Retail Touch Points. ‘Costco Boosts Customer Engagement With Digital Advertising’. 18 April 2013. Web 29 Oct 2014 http://www.retailtouchpoints.com/news-brief/2475-costco-boosts-customer-engagement-with-digital-advertising Wulfraat, Marc. The secret to Costco’s success lies in supply chain efficiency. Canadian Grocer, May 13, 2014. Web 29 Oct 2014. http://www.canadiangrocer.com/blog/the-secret-to-costcos-success-lies-in-supply-chain-efficiency-40691 Wisner Joel, Tan Keah-Choon and Leong G. Principles of Supply Chain Management: A Balanced Approach. Cengage Learning, 2011. Print. Read More