Costco Study Case

The strategic objective of Costco is based on the concept of offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories while producing high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self service warehouse facilities, enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. (1)

1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?

turning over inventory, the company is often able to sell their products and pay suppliers before the invoice is due, even when the company pays early to benefit from early payment discounts. This frees up capital which allows Costco to finance new inventory purchases with supplier payment terms. Costco then passes

For operations, Costco's in charge of managing their store brand Kirkland Signature. Since they have domain over that brand, they are better able to control the caliber of their product. They also maintain the packaging assembly-line in order to accomplish the goal of having an efficient shipment arrangements, and low shrinkage rates. This way Costco can have low rates for quality goods. By keeping their operational costs low they can continue to pass the savings onto their customers.

Costco’s business model is called a subscription business model. This is a business model where customer must pay a subscription price to have access to the product/service. Customers who want to shop at Costco must buy a membership with the promise of lower prices to make up for the initial upfront cost; the current membership cost is $55 in the US. The service that Costco provides is its ability to use economies of scale to bulk buy a large amount of foods at low prices and then to pass these savings onto its customers.

Costco’s inventory management strategy focuses on three main points: (a) point-of-sales system (POS), (b) vendor managed inventory and (c) low volume of stock keeping units. Costco takes aid from innovative inventory system that provides real time inventory information called Collaborative Retail Exchange (CRX). The system monitors and re-orders at the optimum inventory as part of the continuous re-order system. The CRX system analyses the sales for the previous weeks and inventory level which acts as information to the suppliers. Costco Wholesale follows a Bulk-buying strategy. It aims at selling products in large volume and comparatively low prices. The company also follows lower number of stock keeping units (SKU’s), an average of ~4,000

Q1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?

In the case presented both AFLAC and L.L. Bean had their own distinctive ways of utilizing their products in order to enhance the total compensation for its employees. The factor that has deterred more employees away from their current employer is that of benefit packages, and reward systems. As stated by () “compensation affects a person economically, sociologically, and psychologically. For this reason, mishandling compensation issues is likely to have a strong negative impact on employees and, ultimately, on the firm’s performance” (p.313). Many felt just a bump in pay wasn’t enough to substantiate their hard work or the efforts that the performance efforts provided to their organization. As stated by () “the right total rewards system a blend of monetary and non-monetary

Costco’s infrastructure skills and capabilities support operations for achieving low cost global leadership in warehouse retail sales and better than industry average. Costco’s culture strives to provide a limited variety of quality merchandise goods from private label and some well established brands.

Costco’s business model is focused on producing high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of national name brands and select private-label products in a wide range variety. Costco is focused in low-cost strategy is concentrated on a narrow buy segment and out competing rivals by having lower costs, therefore being able serve a niche consumers at a lower price. (Gamble, John and Thompson, Arthur (2009)

Due to the market; bargains were more important to consumers. Fifty-six of Costco warehouses exceeded $200 million in sales in fiscal 2010, and two of these units each did more than $300 million. This rate of revenue is highly attributable to the strong entrepreneurial culture that encourages its employees and management’s teams to be creative and contribute new ideas to allow the company to constantly evolve and improve. It has been well publicized that Costco rewards and compensates its employees well. It is a well oiled machine that reciprocates its success with its customers and employees.

Some of the areas that get affected by global economic circumstances include investment, access to supplies, compensation of employees, hiring of employees, operations, social issues, labor practices, output, marketing, and expansion to new markets. This paper examines the impact of the current global economic and financial conditions on staffing, compensation, operations management, social issues, and labor practices of Costco. The business reality is that the current global economic and financial conditions have not led to cuts in compensation of employees and the slimming down of some of Costco’s outlets as it is the case with other stores such as Wal-Mart. Hiring has also not stalled and labor practices are now being carefully observed to minimize litigation costs. Additionally, contentious cultural and social issues are steered clear of as a way of avoiding any disturbances to an already unpredictable business climate. Costco’s operations management has assumed a leaner outlook with emphasis on quality services from smaller workforces.

Costco's mission is to “continually provide our members with quality goods and services at the lowest possible prices (Costco Wholesale Mission Statement - Profits and Prices Revolve Around Ethics, 2013)

The trunk shows are a unique distribution method for wedding gowns, and this is a unique strategy for Costco as well. There are a few reasons why this method would have been chosen. The first is that the wedding gown business is highly seasonal, and that would encourage Costco to keep gowns in store for a relatively short period of time. However, the more important element is that this strategy meshes very well with the pricing strategy. Costco's objective is to sell a large number of wedding gowns in a short period of time. The trunk show accomplishes just that, by placing a tight time frame on the purchase decision. Brides-to-be are compelled to visit the store when the trunk show is on, and only then. This allows Costco to maximize the daily throughput of wedding gowns, and minimize excess inventory. Any unsold inventory from one show simply is taken to the next one.

Costco’s CEO, Jim Sinegal, quoted, “Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members”.2 They stored the inventory on racks above the items being sold in the warehouse. That reduced their labor cost and saved them a lot time on handling and stocking. They treat their manager as enterpeneur and allows them to decide what item should be sold in their store. They odered most of the inventory directly from the manufactures. It either came directly to the store or went to their distribution center called crossdocking depots. The point of these deposts were to reduce the transportation cost by making sure all truck are full when they come the store.