‘Cost Co’ – A Supply Chain Study

Products they sell…

Corporate Strategy of Cost CO :

Cost Co’s Supply chain process :

Suppliers ---> Warehouses ---> Costco Depot ---> Customers

Cost co 4 major supply chain factors:

1. Delivery

2. Quality

3. Time

4. Cost

Delivery : ‘ Inventory Strategy ’

For high demand items, Costco keeps a two week inventory and is able to replenish its stock efficiently.

The lead time (time taken from when an order is placed to when the Costco truck pulls up at a warehouse) is about one week.

Suppliers affect on-time delivery and fill rates.

If they do not provide the components then needed on time, then the inventory cannot be maintained or the order delivered on time.

Quality :

Quality can be measured in a number of ways.

They are performance of the product (Or) service, conformance to specifications (Or) customer satisfaction.

Costco offers high quality products at affordable prices.

It backs up its products with an unbeatable return policy.

Costco has in place a quality assurance program and works with its suppliers to produce products that meet the needs of the customers as well as achieve customer satisfaction.

Time :

Time can be measured not only for an individual company but also for the entire supply chain.

It is important to consider the time it takes to get paid for a product once it is sold.

We can do this by using the ‘cash to cash cycle time’

Cash to cash cycle time = “Days in inventory+ Days in accounts receivable - Days in accounts payable.”

Research shows that by decreasing the cash- to - cash time improves a firms (Costco) profitability.

Cost :

From an operations point of view , it generally refers to the unit cost of the product or service.

Unit cost is defined as the total manufacturing cost, including materials, labor and overhead divided by the number of units produced.

Reducing costs in the supply chain improves the profitability of Costco and influences the kinds of products and prices which they can offer their customers.

There is cost involved in:

1. Sourcing products from suppliers ,

2. shipping products from suppliers to Costco depots,

3. Distributing products to warehouses and

4. Storing products in inventory.

These are just some of the costs in the supply chain.

Ways to reduces cost along a company's supply chain:

1. Allowing suppliers to manage inventory of their own products at Costco. This is what is known as a vendor managed inventory. The supplier is responsible for maintaining inventory levels and hiring staff to do this. This reduces Costco's labor cost.

2. Costco also practices a new technique called "cross docking" which means most of Costco's inventory is kept in distribution centers, while the remaining goods (such as items to be consumed) are delivered directly to Costco stores.

Supply Chain Management at Costco:

Costco uses vender managed inventory as previously mentioned.

They use “ConnectionHub's Drop-Ship Master application suite”, which allows them to rapidly integrate new suppliers into their existing system.

This enables rapid orders based on Costco requirements.

This allows Costco to maintain efficient supply chain management without taking on any new inventory or risk through orders.

ConnectionHub provides Costco with a single point of integration in which it can contact and interact with its suppliers directly and with ease.

Supply Chain Management at Costco:

Costco can create an ‘wireless tags’ on each pallet of supplies that will be able to be read by its distribution centers and automatically add those goods to inventory.

This would not only decrease time spent delivering goods, but it would streamline inventorying all of the items delivered.