Background and Business Model
Costco is considered as one of the biggest global retailers that provide 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 started by targeting only small businesses, but then changed 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: Offering a limited number of items. Keeping costs down. Maintaining high sales volume. Paying workers well. Selling customers memberships. Targeting upscale shoppers, especially small-business owners. Saving costs by not using advertising.

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.

Technical capabilities that Costco uses to create innovative packaging for increasing consumer safety. this enabled Costco to create a hard to replicate and a sustainable competitive advantage (Morris 2004). they include: • • • Large purchases from manufacturers and importers contribute to the supply chain capabilities through reducing cost and increasing Costco’s power.4% around the world (Costco Wholesale Corp. Low overhead operations: 24-hour distribution centres.S. There are many factors and capabilities that contribute to the success of Costco’s supply chain as a competitive advantage.K Consulting 2010) In terms of memberships.Figure-1 US Warehouse Club Market Size (L. with a member renewal rate of 89.7% in the U. Costco had 67 million loyal members in 2012. and Canada.E. IV. 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). and increasing the logistics efficiency. Annual Report 2012). and 86. limited manufacturing businesses that produce high quality / low cost Page 2 of 7 . 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.

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. the result is that in 2012 Costco’s Inventory turnover was 12. and streamlined supply chain to meet the requirements of its business model. and good customer service (Walker 2008). high value products are precisely what it takes to maintain the power in this industry (Cascio 2006). Costco buys almost all the items from the manufacturers directly. such strategy is aligned with Costco’s main capabilities. a streamlined supply chain. and what Costco calls “treasure hunt merchandising”. this is illustrated in Figure-2 below. high sales volumes. Costco’s management believes that low price.products. This enabled Costco to meet the needs of business customers at lower costs (Morris 2004). good supplier relations. Costco adopted a “best-cost provider” strategy. Low cost strategy requires a unique supply chain. “which are high-end products acquired in closeouts and liquidations” (Walker 2008).6 times the industry average (Costco 2013). Costco Supply Chain Strategy Costco managed to run a highly efficient. Costco’s supply chain uses strategies such as cross docking and VMI to reduce costs and minimise inventory levels. Page 3 of 7 . which is a mix of the following generic strategies. as it serves the needs of the targeted customers. and redesigning products (Sumer 2012). exploiting experience. quick inventory turnover. This strategy has three major components. which are limited product selection. This strategy works well with Costco. low pricing. to combine various shipments to minimise handling and freight costs. and 617 global warehouses with an average size of 143. continuous improvements to the operational efficiencies. V. or to a consolidation point. agile. and differentiation. low cost leadership. which are purchasing power. thus eliminating the costs of the middle man.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. these purchases are either shipped directly to Costco’s selling warehouses.

I Supply Chain Technological Solutions Costco’s CIF Richard Galanti said in 2008 that Costco’s annual IT budget. this saves labour costs for picking. V. while the rest are broken down and sorted by case. Costco currently uses a postdistribution system. and shipping (Sangam 2012). which reduced inventory losses to a level below those of competitors (Spencer 2013). packing. is roughly $50 million Valladolid Page 4 of 7 . which includes supply chain technology. but future plans are made to make the vendors attach the labels for Costco. this means that Costco staff attach labels to pallets after receiving them. which means that almost 75% of the pallets in distribution centres move intact. 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. it allows a distribution centre to process incoming shipments through a crossdocking system. which reduces costs (Abbaterusso 2010). It is also important to mention other factors that contribute to reducing supply chain costs. Costco’s “warehouse concept” is all about reducing logistics costs. where products are sent to a warehouse on a continual basis. Wal-Mart has what is considered by many as the greatest supply chain and distribution network on the planet. the result is that pallets spend an average time of 9 hours in a distribution centre. to avoid all labour touch at the warehouse and further reduce costs (Sangam 2012). this means that they don’t have to sit in inventory for more than 24 hours.Figure-2 Costco’s Distribution Flow Model (Morris 2004) The cross docking system is an innovation that was created by Wal-Mart. such as the strict control Costco has over warehouse entrances and exits. 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).

thus reducing shared costs for administrating orders.C system. and stores them accurately and quickly. when it launched its online store to attract more shoppers by offering unpublicised deals online. this enables Costco to conduct E-Commerce with its suppliers using SPS’s hosted internet service. such as jewelry. This application allows Costco to maintain a supply chain management system that is efficient and agile without adding new inventory or risk. the company spokesman Ron Damiani said that "The [site's] big advantage is accessibility to consumers that are further away from our traditional markets. The company aims to deliver its products more efficiently across its distribution network. competitors such as Wal-Mart are putting more efforts into the E-Commerce business. Costco will leverage i2’s Freight Matrix solutions to optimise its North American transportation network leveraging leading edge decision support systems from i2. V. 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). and improving accountability Valladolid 2008) Costco also implemented solutions from i2 Technologies. Costco’s online store ranks 17th among online retailers. following Costco’s core strategy of keeping costs down (Allison 2012).II Costco Online Operations Costco went online in 1998. Damiani said (Shaw 2005). this technology processes orders electronically. Part of this budget is invested in a suite of integration services to be used by Costco’s suppliers. "It also enables us to put things on the site for which the volumes are too low to justify putting them into stores. Mr. Costco selected the leading “Supply Chain Integration Service” supplier “SPS Commerce” to provide a suite of integration services for Costco’s suppliers." Shipping costs will be priced competitively with other Internet retailers.". this allows Costco to integrate any new supplier into the S. This shows that other retailers are doing better in the E-Commerce. it acts as a single point of integration and contact with suppliers in an easy way (Valladolid 2008). Page 5 of 7 . 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). and single items with a 'wow' factor. but this also allows us to sell [merchandise] on a 24-hour basis. Costco uses Connection Hub’s Drop-Ship master application suite. Costco is exploring social media. This means that Costco will collaborate with its carriers to create an innovative transportation procurement process. Costco’s non-advertisements strategy resulted in the company’s website not appearing in searches. in order to achieve higher levels of performance while reducing distribution and transportation costs.2008). while Wal-Mart ranks 4th with faster growing rate than Costco. but without dedicating much money to it. According to Roeglin. Wal-Mart for example buys social media companies to reach more buyers.

it is important to satisfy customers by being responsive to their needs without having high inventories that eat up profit margins. but this kind of sales is distributed among a larger area. these items are refurbished then re-sold or disassembled for recycling. It is important to mention the role IT plays in facilitating supply chain transparency and information flow. rather than just being a logistics function. Costco offers “white-glove delivery”. which means that the assembly of the item is done where the customer selects. This policy takes the risk out of purchasing. 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. thus contributes to the high sales volume that is critical to the success of Costco’s business model.The average online sale is higher than a Costco warehouse. and the disposal of the packaging is covered with the service (Allison 2012). such a policy is made possible by the efficient supply chain Costco built. In 2007 Costco partnered with Greensight to collect unwanted electronics for dollars on Costco cash card. 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. which made an important source of income to Costco (Reverse Logistics 2007). In Costco’s industry. Costco Reverse Logistics Costco has one of the best return policies in the industry. This report showed how supply chain management if managed efficiently can become a competitive advantage that is hard to imitate by competitors. Page 6 of 7 . this justifies the huge investments companies make in integrating their supply chains using latest technologies. VI. VI. this is where Costco excelled through building a streamlined supply chain.

pdf Allison.com/doc/21176050/Costco-A-Case-Study Page 7 of 7 . L. “Sustainable Solutions Paper: Several Strategic Analyses of Costco Wholesale Corporation”. Morris.com/2012/03/22/solutions-to-avoid-inventory-carrying/ Spencer.com/membership-information. M 2012.coriolisresearch. “Supply Chain Management at Wal-Mart”. http://vijaysangamworld.com/sites/glennllopis/2011/01/31/the-costco-factor-to-win-the-businessgame-you-need-to-change-how-you-think/ Shaw.forbes.php?id=4864 Sangam. “Why Costco and Other Warehouse Club Retailers Matter”. http://www. viewed 8/4/2013. viewed 4/4/2013. “The Costco Factor: To Win The Business Game.reverselogisticstrends.costco. 105-107. “Costco: A Case Study”. http://www. H 2005. viewed 1/4/2013. “Business Strategies and Gaps in Porter’S Typology: A Literature Review”. ISSN 1941-899X 2012.au/2013/01/sustainable-solutions-paperseveral. Supply Chain World. M 2008. pp. Condon.VII. 3.thenewstribune. Executive Insights. http://www.com. viewed 7/4/2013.html Costco Wholesale Corporation Annual Report 2012. viewed 8/4/2013. viewed 8/4/2013.E. “Costco Will Buy Your Electronics”. Journal of Management Research.com/shownews.scribd. Academy of Management Perspectives.pdf Reverse Logistics 2007. viewed 6/4/2013.au/2008/04/supply-chain-management.beefcentral.html?storylink=rss_xml#storylink=cpy Cascio. Valladolid. “Left Behind on E-Commerce.com/p/news/article/1211 Costco Website 2013. K 2012. viewed 6/4/2013.blogspot. “Costco growth puts pressure on supply chain”. The News Tribune. References Abbaterusso. Forbes 2011. V 2012.com/2012/05/13/2143257/left-behind-on-e-commercecostco. http://www. You Need to Change How You Think”. “Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club”. J 2012. J 2008. “Solutions To Avoid Inventory Carrying”.wordpress. No. http://www. viewed 6/4/2013.com/pdfs/coriolis_understanding_Costco. “Costco Supply Chain Management”.jeremyabbaterusso.html Walker.com. http://josephspencermcdaniel. viewed 6/4/2013. viewed 3/4/2013. W 2006. T 2004.com/storage/Supply%20Chain%20Management%20-%20WalMart%20Case. Volume XII.Ca launches soon”. http://team4costco.blogspot. 4. Issue 5. J 2010. “Costco hits internet with online store: Costco. J 2013. viewed 8/4/2013. “Understanding Costco”.html Sumer. viewed 8/4/2013. Costco Hastens to Catch Up”.K Consulting 2010. http://www. http://www. Vol. http://www.

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