COSTCO WHOLESALE

CORPORATION
Contents
Task 1..........................................................................................................................................................1
Task 2........................................................................................................................................................10
References.................................................................................................................................................14

Task 1

Costco Wholesale Corporation is one of the major membership-only warehouse retail chains in
the world. The company conducts its business operations in nine countries at present. The
success of international purchasing often shape the profitability of the company around the
world. Therefore, Costco Wholesale Corporation has separate purchasing team consisting with
people who have proper expertise in the field. The company looks after its supply chain
operations very closely. All the operations of the company has been divided into separate parts &
all the parts or department maintain a good communication network. However, the company has
lot to improve to maintain its place in the global market. The company has already showed its
worth by developing creative or innovative ideas. However, the company must find ways to add
new values at a continuous basis. In this case, the employees of the organization need to be
provided with updated knowledge or trainings.

High-volume-low-margin strategy

Costco Wholesale Corporation has been pursued successfully by Costco Wholesale Corporation
for many years. Costco Wholesale Corporation uses low profit margin strategy to attract price
sensitive customers. In fact, it is used as an effective tool to increase the scope of operation of the
business. For example, in case of targeting the local market or niche strategy, the customer pool
of the Costco Wholesale Corporation would be small & would inescapably close down. That is
why; the Costco Wholesale Corporation believes in the policy that a repetitive customer is a
great fortune for the company no matter what the cost can be.

Figure: Focusing on profit centers by Costco Wholesale Corporation

Source: (Stadtler, 2015).

As Costco Wholesale Corporation sales mass quantities of various items, low profit margin
strategy is very useful for the company. In this way, the company can provide different
additional offerings to sustain loyalty & increasing new memberships as well for the company
(Carter & Rogers, 2010). In this case, Costco Wholesale Corporation has to maintain high
product turnover to maintain the low profit margin.

Costco Wholesale Corporation keeps its stocks with a limited number of products (an average of
3700 at each warehouse). In this way, Costco Wholesale Corporation can offer its products at a
very competitive price by keeping its stock-keeping units limited. This is how, Costco Wholesale
Corporation gains higher sales volume by lower profit margins.
Figure: Inventory Turnover of Costco Wholesale Corporation.
Source: (Goldberg, 2015).

Consistent financial results

The management team of Costco Wholesale Corporation has an outstanding control over its cost.
The company follows cost management procedures very effectively & efficiently. Costco
Wholesale Corporation has a very consistent profitability margin (For the last ten years).
Moreover, the profitability margin of the company has been rising for the last few years due to
its effective cost management system (Hamner, 2010).

Store expansion
However, the number of stores of Costco Wholesale Corporation is smaller than other key
competitors (like Walmart, Kroger Company, Walgreens Boots Alliance, Tesco PLC, Carrefour
SA, Metro Group AG, The Home Depot & Target Corporation). Mainly, it has expand its market
in the United States of America (Jia et al. 2014).
As demonstrated by Jacobs & Chase (2013), In North America, attaining & keeping millennial
customers is very challenging. However, it seems to be a very good opportunity for Costco
Wholesale Corporation. The company is working on it closely & already has some success in the
arena.

Organics and fresh food

Different kinds of organics & fresh foods is one of the main attractions of Costco Wholesale
Corporation. It can also be a useful attraction for the millennials (Park et al. 2011). It can create
new opportunities for the company. The e-commerce system of the company has made it easy for
the company in various fields. It has increase the efficiency of the company in various
operations. It also helps in fast & effective decision making for the top management. It helps to
increase the popularity of its fresh & organic foods throughout the world. It also helps in the
distribution system of the company by transferring or exchanging various important information.

The club membership concept

The club membership concept is one of the exciting formulas for Costco Warehouse
Corporation. It works very profitably for the company; though it has a major disadvantage, (a
minimum amount of population is required to assist the sales over a typical warehouse store).
The membership offer is available in most of the stores of Costco Warehouse Corporation & it is
rising gradually (over the last five years 155 stores globally & 25 stores in Canada). Some
experts criticize Costco Warehouse Corporation as it entices customers in buying at large
quantity even if they do not require the products at such quantities. It is identified as the cash
register shock effect (Newton et al. 2010). In this way, it questions consumers mind whether it is
really cheaper from other competitive companies.
Treasure Hunt Purchasing Strategy

Costco Warehouse Corporation is always determined to serve its customers with standard
products at the reasonable prices. The company does not increase the price of its products for a
short term or temporarily rather than it tries to keep the prices of its products as low as possible
(Jahns et al. 2010). Moreover, it is very much determined to sell the products at the most
competitive price. This concept is known as pricing authority to the customers. It gets possible
for the company, as it follows a purchasing strategy called treasure hunt.

Costco’s Sustainable Competitive Advantage

Costco Wholesale Corporation attains attractive profit by increasing total sales volume &
reducing long term costs by trimming freight expenses, scaling its merchandise, negotiating
prices with vendors, and reducing packaging. In this process, all those savings are passed to its
members. The rule of thumb of the company is to provide eighty percent to ninety percent back
to its members. As demonstrated by Mentzer et al. (2010), this strategy has worked significantly,
as its memberships reached to 81 million customers in the last year.

Trimming Freight Expense

Costco Wholesale Corporation trim freight expense by negotiating with multiple carriers,
getting suppliers to use shipping account number, considering a regional carrier, using packaging
provided by the carrier, investing in prepaid shipping, using online shipping, buying insurance
from a third party, factor in all shipping fees before billing customers, asking about association
discounts & considering hybrid services .

Multiple carriers: As the pricing of the carrier is determined on the volume of products, Costco
Warehouse Corporation ship more products to reduce the cost of the freight (Ship large number
of products, compare prices & influence carriers for lower rates).
Getting suppliers to use the shipping account number: In some cases, Costco Warehouse
Corporation reduces shipping cost by getting suppliers to use the shipping account number of the
company. By this process, the company can increase the shipping volume & also decreases the
shipping costs of the suppliers.

Using packaging provided by the carrier: Using own packaging can bear extra dimensional fees.
In order to avoiding additional or extra service cost, Costco Warehouse Corporation can use the
packaging provided by the carrier (may cut shipping cost by fifteen percent). Packaging by the
carriers does not include any extra dimensional fees.

Considering a regional carrier: Though the delivery network of the regional carrier is very
limited, it reduces the bargaining power of the carriers. This is why; it can be very much
effective in some cases.

Using online shipping: Costco Warehouse Corporation can reduce cost by using online shipping
(save up to sixteen percent on priority mail & up to seventy percent on express mail service). In
this case, some companies also provide free pick up service. It can be very positive for Costco
Warehouse Corporation.

Investing in prepaid shipping: Costco Warehouse Corporation can also reduce cost by investing
in prepaid shipping. It is very useful when the company ship repeatedly the same amount
products & when the shipping cost can be measured in advance.

Buying insurance from a third party: As demonstrated by Seuring & Muller (2010), buying
insurance from third parties can save cost for Costco Warehouse Corporation. In many cases, it
can reduce cost up to forty five percent.

Factor in all shipping fees before billing customers: Costco Wholesale Corporation can also
reduce cost by factoring in all shipping fees before billing customers. All the extra costs should
be added to the bill (Rushton et al. 2014).

Considering of hybrid services: Various kinds of hybrid services may reduce the cost of the
company, though it may kill some valuable time.
Asking about association discounts: According to the various kinds of association (for example,
professional association or partnership association), Costco Warehouse Corporation can be given
up to forty five percent discount from some reputed carriers (FedEx or UPS).

What Makes Costco Successful in International Purchasing & Supply Chain

Management

Costco Warehouse Corporation has very satisfactory renewal rate of annual memberships (fifty
five dollar annual memberships stand at a remarkable ninety one percent). The reason behind the
massive renewal rate of annual membership is its low price membership policy & a persistent
return of loyal members to the company .

Costco Wholesale Corporation evaluates consistently every resources for increasing or

maintaining the rate of productivity (Jonsson & Tolstoy, 2013). The company combines the goal
of overall efficient supply chain with the mix of other external & internal environmental factors
(For example, Costco Warehouse Corporation lately substituted the form of their milk cartons to
get rid of the empty space at the top. The company can fill thinner jugs all the way to the top, so
they can get more gallons onto the same amount of space on a freight truck).
Figure: The role of procurement in supply chain management by Costco

Source: (Christopher, 2016).

In most of the cases, the company purchases the larger portion of the total purchasing directly
from the manufacturers (Sheth et al. 2013). It uses cross-docking facilities that gives the
company a certain competitive advantage over other competitors.

Advantages of Cross Docking Disadvantages of Cross Docking

1.Streamlines the supply chain, from point of 1.Potential partners may not have the
origin to point of sale necessary storage capacities
2.Reduces labor costs through less inventory 2.An adequate transport fleet is needed to
handling operate
3.Reduces inventory holding costs by 3.A computerized logistics system is needed
reducing storage times and potentially 4.Additional freight handling can lead to
eliminating the need to retain safety stock product damage
4.Products reach the distributor, and 5.Labour costs are also incurred because the
consequently the customer, faster moving and shipping of stock happens
5.Reduces or eliminates warehousing costs
6.May increase available retail sales space
7.Less risk of inventory handling
Table: Advantages & Disadvantages of Cross Docking for Costco Wholesale Corporation.

Source: (Hugos, 2011).

With its low price & strong customer loyalty, Costco Warehouse Corporation is growing higher
& higher day by day. Costco is now one of the main key player of the United States of America
& North Americas obesity outbreak . Quality products with low price is the main magic formula
to the success of Costco Warehouse Corporation`s. The company is spreading all over the world
at a fast rate (Fernie & Sparks, 2014). The company is adding various new departments to
increase the efficiency & effectiveness in its business operations (a drugstore, an optical-
dispensing center, one-hour photo services, a food court, and the ever admired and low-priced
hot-dog stands). Costco Warehouse Corporation follows big box retail concept that entices
customers to buy in a larger quantity to save money (Kaufamann & Carter, 2010).

Advantages of Big box Retail Disadvantages of Big Box Retail

 As a Big-box store, Costco often  Not everything in big-box stores
offers huge discounts on big-ticket
items compared to specialty stores or
smaller retailers. Therefore, one can
save hundreds of dollars on
electronics, appliances and other large
merchandise.
 Big-box stores typically carry items in
the extra-extra-large size, which is
fine for large families who go through
lots of food and other items, like paper
products and toiletries.
 If customers have a large family and
do frequent shopping, the money
customers save over the course of a
year (depending on what they
purchase, of course) can easily cover
the cost of the membership fee.
 Sometimes fighting the crowds is
worth it just to get a good bargain. If it
were not, retailers would not count on
Black Friday sales to help them
through the fourth quarter.
 Customers who typically shop at big-
box stores are not so much interested
in making friends with the sales
carries a deep discount.
 The problem is finding space to store
towers of bathroom tissue and that
case of dish detergent, or squeezing
items into a tiny freezer.
 If the customers do not frequent go to
the store, the fee may not be recouped,
so they may think that it is better
shopping at a smaller retailer or local
market and save the initial fee.
 Waiting on long lines, circling the
parking lot for a space and struggling
to get down the aisles can be stressful,
not to mention time consuming. When
customers figure in the hours spent on
your quest for a bargain, well, it
doesn't seem like such a bargain
anymore
 Big-box store employees are typically
stocking shelves and helping
customers grab items from the top of
the rafters. Some shoppers, however,
need more intimate interaction with
the sales help, which smaller retailers
or specialty shops can offer.
 associates as they are in making their Customers may not find that personal
purchases. attention in the big-box stores.

Table: Advantages & disadvantages of Big Box Retail Store for Costco Wholesale Corporation.

Source: (Hugos, 2011).

Moreover, it can be said that the success of big box retail store depends on the characteristics of
the target market.

More than half-offered hearing-aid centers and a handful were equipped with print shops and
copy centers. More generally, not all big-box chains are created equal. The big-box retail
literature has fixated almost exclusively on Walmart, examining its effects on a wide range of
outcomes, including prices, labor market consequences, small business activity, time use,
obesity, and social and cultural pointers.

Costco Warehouse Corporation has been unable to maintain the city level panel grocery price
with obligatory retail price. The company has been facing this problem in the area where high
grocery densities. In these cases, the size of the target market is too small. However, the solution
of the problem does not lie in reducing the price rather than the company need to build
segmented market models (mixture of brand loyal & price sensitive customers).

Task 2

Many challenges are awaiting for Costco Wholesale Corporation in international purchasing &
supply chain management. Day by day the total procedure of international purchasing & supply
chain management is getting difficult due to the immense competition & other internal &
external factors. Now a days the management has to examine legal barriers very closely at the
beginning. Therefore, only focusing on reducing total cost or maintaining a timely delivery
schedule is not enough for Costco Wholesale Corporation. Even the company has to work
consistently to maintain the public image & the customers are aware about the ethical &
environmental matters before taking any decision.

Figure: Purchasing power parity in international business

Source: (Fawcett et al. 2013).

In the coming days, the procurement team will have to take more responsibilities within the
organization. The procurement team will need to work with creative team to be the key protector
of the brand of the company. The procurement will also need to work for research &
development department. In this way, new product & services will be developed successfully
with the help of the procurement team (Srivastava, 2011). Ensuring transparency will be a big
challenge for the procurement team in terms of international purchasing & supply chain
management.
Risk: In the coming future, Costco Wholesale Corporation will have to go through a major
strategic shift by moving away from giving more importance on taking a more holistic strategy.

Figure: Risks in supply chain management & international purchasing by Costco Wholesale
Corporation.

Source: (Gold et al. 2010).

Sustainability: Apart from maintaining a consistent flow of cost, the company will also have to
work for maintaining a sustainable economic & social value.

Globalization: As described by Steinle & Schiele (2010), the traditional demand & supply pole
has been changing because of the rapid globalization. Costco Wholesale Corporation will have
to invest more money & other resources in terms of research & development. The company
needs to ensure the availability of market or industry information to step ahead of the
competition. Costco Wholesale Corporation will have to ensure local expertise in countries like
China, India, Brazil, Bangladesh & Russia.

Integration: In the coming future, customers will become more & more aware about the
environment because of the current critical situation such as global warming or greenhouse
effect. In this case, Costco Wholesale Corporation will have to more environment friendly in its
operation. The company will also have to do more customer social responsibilities or CSR
activities to maintain a sustainable plane in the mind & heart of the customers.

Finance: Costco Wholesale Corporation will need more resources to manage the global supply
base. In this case, the company needs to create attractive business models to entice the investors
for financing into the company.

Innovation: Innovation & creativity will be prime factor for success in the field of international
purchasing & supply chain management in the coming days. For this reason, Costco Warehouse
Corporation will need to assist its procurement department with the proficiency in engineering,
new product development, design & other technical & non-technical expertise.

Shifting Priorities: Shifting priorities with the changing internal & external environment will be a
big challenge for Costco Wholesale Corporation in upcoming days. In this case, the company has
to determine market needs & the organization capability very carefully. Costco will also need to
reduce the gap between supply & demand. Demand should be shifted when there is high demand
for products & services in the marketplace. The company may get help from external resources,
when the demand is too high for the company.
Figure: A risk based approach to suppliers in shifting strategic priorities by Costco.

Source: (Diabet & Govindan, 2011).

Collaboration: In order to cope with the In the future, Costco Wholesale Corporation will have to
maintain collaboration among departments & stores. All the stores need to maintain a certain
standard so that the brand image of the company remain intact . In this case, a good
communication system has to be ensured between the internal & external forces. To fill the gap
between supply & demand, Costco Wholesale Corporation may get help from external
collaborative outsourcing (Waters, 2013). Therefore, the company will have to build external
collaboration models.

Transparency: Maintaining transparency will be a huge challenge for Costco Wholesale

Corporation in the upcoming days. Day by day, it will be difficult for the company to maintain a
certain level of transparency inside & outside of the organization. In this case, increasing the
acceptance of information transparency is going to be a big factor (Van, 2010). That is why, the
leaders of the procurement department of Costco Wholesale Corporation need to adopt a social
mindset. In this case, social media can play a big role for Costco Wholesale Corporation.

In terms of doing any business, future always brings new challenges for the company. Therefore,
Costco Wholesale Corporation will face some too. As time passes, the competition increases
rapidly. Moreover, there is always threat of new entrants into the industry. That is why; Costco
Wholesale Corporation needs to work on innovation & creativity to cope with the competition.

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