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.

About Costco

Costco is the largest membership warehouse club chain in the world based on sales volume. It has warehouses, depots, and many featuring facilities in more than half the United States and in nine Canadian providences, as well as Puerto Rico and five European and Asian countries. Costco’s goals are primarily to offer the best shopping experience which is fun for both members and employees. The Costco home office resides in Issaquah, Washington. As of March 2007, Costco has 506 open warehouses.

The following is a list of Costco’s goals that are presented to a prospective employee prior to filling out an application:

We believe that Costco Wholesale provides a great shopping experience and is fun for our members and our employees.
WE BELIEVE THAT IF YOU DON’T WANT TO DO YOUR BEST, Costco Wholesale is not the place for you.
We believe in hiring individuals with a high energy level and a positive attitude.
We believe that our employees are the best in the retail industry.
We believe in recognizing and rewarding positive behavior and performance.
We insist on courteous, friendly and responsible behavior and performance.
We believe “good enough” isn’t.