Project Scheduling

Costco has expanded its warehouses to 529 locations, in 7 countries. It has recently began a project to open several locations in Melbourne, Australia

A Costco spokesman, who is in Australia investigating outlet opportunities, said that Melbourne was a "good opportunity" and the company "would like to be part of the Melbourne landscape".
The company is understood to be keen to launch in Australia as soon as possible, but it may be up to six months before the first warehouse is opened. New Location

To be able to open up the warehouse in 2008 Costco relies on Sitefolio™ , an innovative software application offering the retail industries a centralized and customizable solution for managing a portfolio of construction projects and building sites.

Tasks required in this project included collecting historical information regarding the previous building projects on the same site, collection data about the permit process in the jurisdiction, site easements, and obstacles with the original construction or remodel.

Using the software also made it possible to generate, centralize and provide team access to project status reports, contracts and all required communication at varying levels of detail whenever needed.
Costco uses modules that generate a weekly review report and Gantt charts.

Costco's project scheduling allows it to have a new warehouse up and running in just 120 days.

We would recommend for Costco to state that the project will take several weeks more than the usual 120, this will leave room for error and also will impress the public when the project is completed ahead of schedule.

Supply Chain Management

Costco purchases their merchandise from numerous domestic and foreign manufacturers and importers. They have thousands of vendor relationships.
Costco's forte is its unparalleled purity of operation. It prunes everything but the most essential volume-driving items and receives them packed in one form: palettes.

"As our president Jim Sinegal likes to say, we are in the item business, not the category business," noted chief financial officer Richard Galanti. "We will do over $45 billion in fiscal 2004 with just 4,000 sku's."
He said the company's annual IT budget, which includes supply chain technology, is roughly $50 million.A disciplined focus has allowed the wholesaler to standardize rapid-fire cross-docking in all its distribution centers. Seventy-five percent of Costco's goods are cross-docked, spending on average nine hours in a distribution center, Galanti said. Distributors deliver the remaining 25 percent of goods - fast-moving bulk goods like soda and potato chips - directly to individual stores.

SPS Commerce, the leading Supply Chain Integration Service supplier provides SPS` suite of integration services to Costco suppliers. Costco will utilize SPS` hosted Internet service to conduct electronic commerce with its nationwide network of suppliers. Utilizing SPS Commerce`s Vendor Enablement Services, Costco will take advantage of a proven formula for performing successful community enablement and management that emphasizes best practices rather than just technology. With SPS Commerce`s online service, SPSCommerce.net, orders are electronically processed and stored quickly and accurately. Costco and their suppliers gain maximum administrative efficiency, reduce shared expenses and improve system accountability. See SPS Service.

Costco will also implement solutions from i2 Technologies Inc. in order to achieve higher levels of performance while driving down transportation and distribution costs across their transportation network. The company aims to deliver its products more efficiently across its distribution network. Costco Wholesale will leverage i2’s FreightMatrix solutions to establish the strategic framework for optimizing its North American transportation network leveraging leading edge decision support capabilities from i2. Using the solutions, Costco Wholesale will collaborate with its carriers to enable an innovative transportation procurement process. Additionally, the company can enable strategic modeling and what-if analysis capabilities to allocate the optimal carrier base to specific lane volumes while balancing cost and service level requirements.

Quality Control

Costco is one of the leading wholesale companies due to its quality control efforts. They use continuous improvement. They are always looking at new ways to improve their process. They don't get satisfied with their processes, and use fishbone diagrams. These are cause-and-effect diagrams which clearly show potential causes to problems.

Similar to Six Sigma, Costco also uses a Net Promoter Score (NPS) for customer management. This gives a ratio for the growth and the customers returning. Costco has the highest NPS and by far the best growth among its competitors. Customer loyalty is a major concern to all successful companies. It is much cheaper to keep existing customers than to gain new ones.
Ideas they should consider involve customer feedback. Online surveys are an easy ways to gain information and reach your customers. Having the option to e-mail Costco with comments or concerns is also a feasible idea.

"Customer satisfaction has reached its highest level since the second quarter of 1995, according to the latest American Customer Satisfaction Index.
In the specialty retail category, Costco is ahead of its competitors with a score of 80. Lowe’s and Sam’s Club are relatively strong, both scoring 77. Best Buy (72), Home Depot (73) and Circuit City (73) rounded out the category." Quality Digest

Managing Quality

Costco’s four dimensions of quality include quality of design, quality of conformance, the “abilities”, and field service.

The quality of design includes a market analysis that suggests the construction of a one-stop shopping location. This site would offer various services such as optometrists, photo developing, and tire replacements, as well as products that are high in quality and low in price.

Quality of conformance is reflected in the layout of the building. The warehouses do not need elaborate facilities, so merchandise is stored on racks above the sales floor and displayed on pallets containing large quantities of each item, thereby reducing labor required for handling and stocking. This in turn allows for quicker delivery and placement of a display product that may be unavailable from the sales floor. The sales floor is normally designed for economy and efficiency, the classic layout of a Costco warehouse involves the division of food to one side of the building, appliances and office supplies to the other, snacks up front, clothes in the middle of the store, and perishables near the back. All stores are arranged in the same manner so a member can easily shop at any location.

The abilities which include the availability, reliability, and maintainability of a wholesaler like Costco are rated higher by comparative shoppers. The warehouses generally operate on a seven-day, 69-hour week. They are open weekdays between 10:00 a.m. and 8:30 p.m. Gasoline stations service customers with extended hours. Since the hours of operations are shorter than many retailers and supermarkets, and due to the warehouse-type operations, labor costs are lower relative to the volume of sales, resulting in lower prices for the customer.
Costco’s trained employees are periodically tested and updated on newest product developments. However not every employee will deliver reliable service, a butcher in their deli will not be able to give the member tire information or vice-versa. Fortunately for the customer Costco strive on retaining its current members as much as it wants to get new ones. The maintainability for Costco’s service allows an unsatisfied members to simply mention their experiences to a supervisor or manager and they will immediately receive a compensation for their troubles. Customers have the benefit of feeling secure in their purchases; all of Costco’s services come with a guarantee or warranty. Tire installations come with a free lifetime balance and rotation service and free flat repairs. Photographs can be returned if the member is unsatisfied as well as reading glasses.

The field service is a major reason why members join Costco. “Costco no longer has a 1-year return policy for televisions and higher-end electronics but they still offer great consumer protections and fabulous customer service.” Love Costco. The policy of member satisfaction accepts the return of merchandise. In 2007 Costco introduced a 90-day return policy on certain electronic items such as television and digital cameras, but now they provide a technical support service that is free of charge, as well as an extended warranty of certain electronic items.
Right before you exit Costco’s doors, you will usually find a wooden box with a notepad reading “Member’s Comments.” Customers usually fill them out when they are really upset about a product or service or when they feel that an employee went out of their way to accommodate them.

The best system that Costco uses to check quality is the number of new members that sign up annually and the members that renew their current cards. This clearly shows how many people are satisfied with the products and service, mainly because Costco relies on word-of-mouth for advertising. Members rarely fill out the surveys and comment pages, but like many people if there was something free given after filling them out more people would. Online sites usually give a discount as a thank you for taking your time. Costco needs to be aware of how a customer is feeling during their yearly membership before it is too late. Another method can be email surveys sent out after 6 months of membership. Happy members are forever.

Service Process Design

Costco Wholesale offers lower prices than many of its competitors like Best Buy or Circuit City, however it is recommended to do your own research prior to purchasing a camera or computer because customer service is close to non-existent. The tangible service is accurate and fast at Costco’s tire center, pharmacy, and optical department, but the warehouse usually receives low marks for service by many club members.

The psychological benefits of the service include the “no frills” warehouse layout, "We stack the merchandise on the floor with a price and a sign on it telling what it is," said James D. Sinegal, president and chief executive officer of Costco Wholesale Corp. No frills

Other benefits include the satisfaction of purchasing a broad range of high quality merchandise at prices consistently lower than many of its competitors that is also focusing on environmental concerns and preservation.
And finally the facilitation goods are the wide range of products available in the various departments either at their physical warehouse or through their website.

In the service matrix Costco falls under the co-routed services, because unlike many retail stores Costco members join for more reasons other than just grocery shopping in bulk. Some members join only for the services provided at the tire center, others for the optical department which consists of its own in-house optometrist, and then there are those who choose the website services available such as financing or business services. The actual shopping in the warehouse would be considered provider-routed, because all the customers follow the same process and shopping, check-out, and loading in items in your car.

In the warehouse employees are available to answer questions about a product, help loading products or simply pointing a customer in the right direction. Costco has self-service warehouse facilities, in which the employees folding clothes or organizing the DVD sections have no trained knowledge of the department and can only answer questions they have learned along the way. Certifications are required however in the pharmacy, tire center, and optical department, since those sections have more customer contact. The employees in these departments are knowledgeable and confident in the products they offer. Even though these front-office employees focus on sales, they receive no commision from Costco. All employees are paid hourly, including the back-office accountants, inventory auditors, and stockers. Benefits and above-average salaries mixed with a lively work environment keep employees happy, which in turn will mean a happy customer.

Costco focuses on high quality products at a low cost, even though it is trying to shift its customer interaction by training most of its employees to be more aware of the products, it is still required to do some research prior to shopping. "Costco is no Walmart."

Being a warehouse club, customers at Costco must pay for a yearly membership. This means that management must satisfy its members to guarantee that they will renew at the end of their fiscal year. Technology is used with the cash registers, computer system for inventory, and handheld scanners to read a member's card number. These scanners display the customers annual shopping, and allow the employee to suggest the benefits of upgrading to an Executive Costco Card with 2% Cash Back.

Unlike many retail stores, Costco has a no-hassle refund policy; a customer can return a half-consumed rotisserie chicken and receive a full refund. Members are aware that they are paying to shop so they have no problem complaining to managers. Understanding that the yearly membership creates an economy of shopping, managers will gladly refund the value of a service and also extend their membership knowing that this just means they have more time to shop at Costco.

Process Selection

a. What type of product flow do they use?

Costco Wholesale Warehouse uses the batch flow. It carries an array of finished goods at it’s location for its customers. Costco limits it product selection to fast-selling, branded and private-label products. On average Costco carries between 3,700 to 4,500 products per warehouse. In comparison, discount retailers and supermarkets normally stock between 40,000 and 60,000 products.
Costco purchases in large volumes due in large part to its size. However, the company also has a practice of purchasing whatever it can get a good deal on. If Costco can negotiate a favorable price it will purchase a large quantity from that supplier. If it cannot, it will not purchase the product and will switch its massive volume of purchasing to another supplier. Costco has aligned itself with several different suppliers.
Besides its physical inventory Costco also supplies its members with a plethora of services that are provided by a third party. Examples include; Ameriprise, which works with Costco to offer discounted auto and home insurance, Lending Tree provides real estate agent services, and their very own Auto Buying Program has relationships with new car dealers to make buying a new car easier and more affordable.

b. What type of customer order do they process?

All the products available in their stores are available on their website; however some items are available only online. Products are made-to-stock because they are over the counter merchandise finished goods that are sold in bulk to a customer. Ordering a product is only available on their website, Costco.com, or tires can be ordered directly from the tire department located inside most warehouses.
Within the store itself the bakery department would be considered made-to-order because a customer can customize cakes or pies to their specifications and can be ready in a couple of hours.
Business members can take advantage of the Business Center located on their website, which carry a product selection tailored specifically for food service, convenience stores and offices.

c. Which cell do they fall into in the process characteristics matrix?

Costco is a distributor of finished goods and a few made-to-order items. They purchase in batches and sell high volumes of a particular product. In comparison to other wholesalers they carry fewer in-store products but offer overall more than all of its competitors.

d. What are some of the factors influencing their process selection?
Costco constantly focuses on having the most available capital. The company strives on high volume sales and rapid inventory turnover. This will give them the opportunity to sell and be paid for inventory before they are required to pay the actual merchandise vendors. As their sales increase and inventory turnover becomes more rapid, a greater percentage of inventory is financed through payment terms provided by vendors rather than by their own working capital.

e. Can they adopt any of the mass customization methods discussed?

The customization of finished goods sold at Costco would be unnecessary to a customer because many plan to resale the items for a profit. However, using a fast changeover approach for orders made online can be possible since orders would be forwarded immediately to the third party. Any product ordered online is always shipped to the customer’s house, but a special order should be sent to any requested warehouse along with merchandise from the same distributor.

Inventory System

Costco operates membership warehouses that offers its members low prices on a limited selection of natioally branded and selected private-label products in a wide range of merchandise categories to produce rapid inventory turnover.

Costco buys the majority of its merchandise from manufacturers and routes it to a cross-docking consolidation point call a depot or directly to its warehouses. The depot receives large shipments from its distributors and then reallocates them to their individual warehouses in less then twenty-four hours. This inventory system maximizes handling efficiencies and lowers receiving costs by eliminating the costs of multiple step distribution channels.
All U.S. merchandise inventories use the last-in, first-out (LIFO) method, and all foreign operations use the first-in, first-out (FIFO) method.

Costco Wholesale uses the "Q" system to determine its inventory needs. Auditors monitor daily sales and schedule orders that are delivered throughout the entire day from their depot. Early deliveries of baked good and perishables are delivered directly from their original companies.

Seasonal or limited items are only ordered once and will not be reordered when inventory is down, Costco does this to entice people to purchase a product as soon as they see it, rather then assuming that it will be available later or can be ordered.

Costco's concept, dubbed arrogantly simple by Chief Financial Officer Richard Galanti, is "limiting the sale of high-quality products to roughly 4,000, which reduces inventory and costs, and selling large quantities to improve margins." Costco Article.