Costco: operational excellence in the retail industry

Operational excellence is based on several key concepts, which can be applied to all sectors. Costco Wholesale, the world’s second-largest retailer by revenue, is reaching new heights through operational excellence. See how diversity reduction, flow management and other concepts are propelling them to the top.

Costco is a retail, supermarket-style store based on an annual membership to access the store. We find food products (including fresh and frozen), household products and equipment for the house (television, bicycle, etc. …). With 842 warehouse clubs worldwide, including 579 in the United States and 107 in Canada, Costco has demonstrated the power of its strategy. Costco opened its first store in France in May 2017 and is present in Mexico, Japan, Korea and New Zealand.

Reduction of diversity

As clearly announced in its strategy, Costco limits the number of products sold in stores to 3300 permanent references and 500 rotating references, that is 3800 in all. A classic department store like Auchan or Walmart offers up to 150,000. That’s forty times less!

You already know the impact of too much choice, which paralyzes the decision. In retail, 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 in added value

By offering fewer SKUs in the same amount of space as other stores, Costco can leave products on pallets. The warehouse store then saves costs on shelving, since a cart comes to put the pallet with several dozen or hundreds of products. This eliminates the need for manual shelf replenishment. To do this, they work upstream with suppliers so that pallets can be used as displays. In the end, it is as much saved for the customer.

Costco warehouse club shelf
Thomas Hawk

What is the value of a person moving a carton of milk from a pallet to the shelf and then placing it on the shelf? None: the customer can take it directly from the pallet!

Just-in-time flow management

Fewer references also means faster stock rotation, and therefore fresher products for food. Larger purchase volumes on a single part number offer the possibility to go directly through the manufacturers and deliver directly to each store, thus reducing wholesale costs and therefore logistics. Kanban is simple: an empty pallet is replaced by a full pallet.

Team management

Finally, Costco offers above average employment conditions in an often unattractive sector. In addition to the basic salary, which is well above the minimum wage, there are opportunities for advancement, even without a degree. Motivated teams are more productive, more efficient, more helpful, which directly impacts the company’s results. Staff stability also helps to ensure sustainability and knowledge retention in-house.

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