Costco: operational excellence in distribution

Operational excellence is based on several key concepts, which are available in all sectors. In this article, I’m going to explain how Costco Wholesale, the world’s second-largest retailer, is at a peak thanks to operational excellence.

Costco is a supermarket-type retail store based on annual membership to access the store. It includes food products (including fresh and frozen), household cleaning products and equipment for the home (TV, bike, etc …). With 715 warehouse clubs worldwide, including 501 in the United States and 91 in Canada, Costco has demonstrated the power of its strategy. Costco will open its first store in France in May 2017.

Reduction of diversity

As clearly stated in their strategy, Costco limits the number of products sold in stores to 3300 permanent references and 500 references in rotation, or 3800 in total. A large classic sales area like Carrefour or Walmart, offers up to 150 000. You already know the impact of too much choice, which comes to paralyze the decision. In the distribution, the choice would also impact the average cost of the customer basket.

From a logistical and operational point of view, this strategic positioning has several impacts.

Increase of value-added

By offering fewer references, on a surface equivalent to other stores, Costco can leave products on pallets. The warehouse store then saves costs on shelving, since a  hand pallet truck comes to place the pallet with several tens or hundreds of products. It is no longer needed to manually fill the rays. To do this, they work upstream with the suppliers so that the pallets can serve as displays. In the end, it saves as much for the customer.

rayon du club-entrepôt Costco
© Thomas Hawk

What is the value, that someone brings a milk bottles pallet to the shelf, then places each one in the shelf? None: the customer can take it directly from the pallet!

Just-in-time flow management

Less references also mean faster inventory turnover, which means fresher food products. Higher volumes of single-item purchases offer the ability to go directly through the manufacturers and deliver directly to each store, reducing wholesale and logistics costs. Kanban is simple: an empty palette is replaced by a full palette.

Team management

Finally, Costco offers advantageous work conditions in an often unattractive sector. Motivated employees are more productive, more efficient, more helpful, which directly impacts the bottom line. Staff stability also helps to ensure the sustainability and maintenance of internal knowledge.

à retenir

These are just a few of the competitive advantages Costco gains from its mastery of operational excellence. A smart balance between customer needs, costs and employees. With the competition in the distribution sector, you have to stand out to break through.

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