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Introduction to Costco’s Business Model and Vision
Costco was established by American Businessman Jim Sinegal in 1983 in Seattle Washington, with a vision and mission to continually provide members with quality goods and services at the lowest possible price point possible. Their businesses key to success involved establishing a direct buying relationship with their suppliers which encourages and enables effective supply chain management, and allows them to buy high quantities of items at an incredibly discounted price. The hard work put in by its owners to establish numerous strong relationships with multiple suppliers allowed Costco to control all aspects of their supply chain from order placement to the acquisition of goods within their warehouses all put in one place in front of a large variety of customers to ensure they can afford to continually support Costcos company vision.
Costco’s Competitive Edge and Membership Structure
Costco is officially the largest warehouse club in the world based on their volume of sales. Their business structure offers customers three levels of memberships and provides members access to a wide variety of products throughout store locations spread across 761 locations worldwide with their headquarters based in The United States, Washington. Because of their wide variety of products sold Costco also has to compete with a wide variety of brands. But their main competitors would be stores like Amazon and Walmart whomst also sell a wide variety of products at as cheap a price as possible. Their founder Jim Sinegal once defined his companies visions as giving the best to the customer at the best value possible . And this is Costcos main driving force to customers offering large wholesale portions of all their products at a low price for the amount of product received. Because of this driving force it is vital that Costco manage the costs of their supply chain perfectly to ensure they can sell their products as cheap as possible to compete with their thousands of competitors. Costco also ensures its members remain satisfied with some of the most lenient return policies found in wholesale stores (an average of 90 days) and by offering cheap fast food options in store to increase customers perceived value for the money. Their business model emphases their low prices and volume purchases in order to accomplish profit at a low margin with their stores offering seasonal discounts on rotating products, these discounts are referred to as treasure hunts as they are not available for purchase throughout the year.
Their mass volume purchasing from their suppliers allows them to save millions a year in shipping and marketing. Quality products from low prices in limited selection ordered based on forecasting tends to result in a quick turnover of their inventory. This business modal of mass volume purchasing with annual membership fees is designed to help small and medium sized businesses lessen their bulk purchasing costs as well as support large families with goods packaged in bulk ranging in from typical fresh food produce, the latest electronics, office supplies, car tires, and alcoholic beverages. They even go as far to sell services such as real estate, home insurance and travel services to those with higher tier memberships. Costcos target customer base are generally found to be overwhelming affluent, being able to afford to buy in bulk, but their age range and background can vary drastically amongst customers, this is likely due to the fact the Costco has grown to be one of the worlds largest companies with more and more members flocking in every year. And despite this Costco continues to grow seeing an almost 7% increase in net worth over the past year alone.
Supply Chain Management: Costco’s Strategic Approach
The focus of this assignment is to analyse the supply chain operations of Costco. I will be relating them to the business focus whilst also assessing its strategy on its ability to maintain a competitive edge, after that I will be evaluating Costcos supply chains sustainability and providing techniques Costco could employ to further improve their sustainability. Since Costcos goods are transported directly to the store grounds upon arrival and Costco does not manage their inventory but it is instead managed by vendors, the price of inventory and labour costs of handling products are largely nullified.
Costco’s Inventory and Vendor Management Techniques
For example in their fresh produce and meat sections they focus on low-price and high volume strategies, and because all of their products are sold by second-party vendors Costco itself has very limited storage for perishable products. This inventory management strategy means that all vendors must Forecast their product orders, having to estimate based on previous sales and environmental factors how much product they should order to meet customer needs perfectly. Costcos inventory management structure gives them a huge advantage over their competitors such as Walmart who have been known to struggle with the issues of perishables. Costco has incredibly well documented buying relationships with many internationally famous brands and are able to be supplied to directly from suppliers through their numerous shipping distribution points throughout the US and in other established countries. Their partnerships with big brands have also resulted in numerous multi company projects. For example in 1999 they created a partnership with American Express working together to create a custom credit card called Costco-AMEX with specific in store discounts for Costco, helping both brands acquire more customers with promises of huge discounts. Costco has also made great strides throughout their supply chain by maximising their transportation efficiency.
One strategy that they implemented was the redesign of their product packages to maximise the amount of packages that can fit into an individual truck. They also practice the cross-docking of products by delivering some directly to Costcos selling stores whilst the remaining products are kept in distribution centres saving both time and money through their supply chain. They also relay information between trucks and delivery points with an intricate setup of buzzers to indicate when trucks arrive, where their products need to be unloaded and their drivers remaining. Costcos warehouses are intentionally established remotely to lower property costs. Costcos department of information technology embellishes itself with its advanced connection of all warehouses to their central headquarters in Washington. They do this by using their EFIM system which can provide real-time information updates and gives them easy access to control the inventory of all warehouses at once. Costco employs the use of a partial vertical integration with a cross-dock distribution system. By establishing more control over its inputs and outputs by sourcing directly from suppliers they have much greater control over the delivery time and variations of products they receive. This elimination of middle men results in decreased costs which are ultimately transferred to the customers.
Evaluating and Enhancing Costco’s Supply Chain Sustainability
The measurement of supply chain performance can be measured in numerous ways. Businesses tend to measure success through their level of profits or market share, but whilst individualized experiences such as customer service and satisfaction can be hard to measure they are still absolutely vital part of Costcos success. Costco aims to reduce unnecessary costs plastic shopping bags, excessive shop floor staff and expansion into areas with less selling power. And with the money theyve saved from these things Costco has been able to focus on improving their buying power to allow for greater output. Because their inventory is turned over quickly, Costco can afford to offer suppliers fast tracked payment, this fast tracked payment is generally rewarded, as early and continuous payments can be heavily discounted. Their main costs are related to storage distribution, shipment, transportation and the sourcing of products from multiple geographically distant suppliers. However experts have noted that efforts can be made to improve Costcos supply chain management, specifically by implementing a better supply chain integration program that takes into account to notion of avoidable costs such as packaging and storage locations.
Costco could partner with more service providers and suppliers for better operations flow as well as well as studying their competitions practices and applying some of their techniques (specifically in their marketing campaigns), which would likely lead to more long term success. More travel business services could be implemented throughout Costco stores, like money orders and currency transfers to attract customers with a different set of needs and potentially expand further into the travel industry than they already have. Greater awareness to customers through marketing campaigns would also be efficient as currently email messages seem to be the only way Costco advertises promotions and new products. All of these suggestions would likely result in a more established and effective means to lure customers into stores and expand their business to new revenue streams. Growth opportunities involving businesses entering the Asian and European markets have not been exploited by Costco. From current operation methods their high staff salary, and low margins maintenance need to be looked into and altered if they are to continue thriving in the future.
Future Prospects and Challenges for Costco
With their CEO coming to the end of his working days and with competition growing at record rates it is vital Costco keeps an eye on rising political threats especially involving the new sustainability laws rolling out in years to come. To best deal with these issues, it is vital that Costco takes time to assess issues such as their lead time management, products handling, quality, inventory management and transportation. Whenever available, Costco should have sales promotions to enhance their desired image of maximum value from products sold in bulk, this may temporarily reduce Costcos short term profit margins but if managed properly the publicity created for the company should more than make up for all of the marketing expenses. Expansion into overseas markets is still a relatively untapped forced for Costco and with the rigid store structure and financial backing Costco can provide it would be likely to result in a tremendous increase in profit. The innovation of more private brands for a wider range of products, and an increased focus on customer loyalty programs would all be worth implementing as well, especially put in place of a business plan that needs to be established before the retirement of the CEO.
To further demonstrate the importance of good supply chain management in defining business performance and holding onto Costcos competitive advantage, undertakings such as maximised volume purchasing, their package handing, product distribution, supplier implementation and customer marketing communication have each contributed to highlighting Costcos numerous capabilities and level of performance with each section of their operations resulting in the unique advantages and disadvantages Costco is required to deal with. A continual review of their supply chain practices will continually ensure that management at Costco can continue to compete with competitors with supply chain requirements like lean management and forecasting. Just in Time resources planning distribution, replenishment procedures, and their optimization of transportation have all played had major positive impacts, but should be subject to continued review to ensure Costco retains their industry wide competitive edge.
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