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Operational Analysis of Costco Company

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Introduction

Costco is one of the largest retailers in Canada. Its story dates back to 1976 when its founder, Sol Price came up with a ground breaking retail concept in the city of San Diego in California. Jim Sinegal and Jeff Brotman opened the first warehouse in Seattle, Washington in the year 1983. Later in 1993, Costco and the largest warehouse merged forming a largest and gifted leadership team making Costco the world’s largest and most successful club globally. Today, Costco carries a total of 4,000 stock keeping units when compared to 30,000 units that are common in supermarkets. The retail deals in electronics, computers, furniture, outdoor living, appliances, and jewelry among other stuff. The company has overseas subsidiaries in a couple of countries with many of them concentrated in China. For instance, in 2014 Costco opened an overseas store on T Mall International intending to give e-commerce in China a challenge, it opened another store, franchised one in Wuhan to try offline store, in September 2017 it opened a store in Shanghai and local flagship store through T Mall in China. These are some of the critical developments of Costco Company in China, one of the countries offering it the toughest competition in the market

Costco is governed by a code of ethics that has enabled it to remain as one of the leading world retailers. Costco code of ethics includes obeying the law which is irrefutable, taking care of its members and employees, respect suppliers and rewarding of shareholders. As a result of these codes of ethics, the company’s corporate social responsibility is given a forehand in whatever decision the company takes.

This report provides an overview of the operations and the efficiency of Costco, its Processes, Layout, service performance and the challenges. To know about all these elements our team has visited the King George, Surrey branch of Costco on May 4 and May 6, 2019. We get to know about the operations and strategies followed by Costco by observing certain things on the site, via online research and also through the meeting session with the Assistant Manager of the store, Taran Singh.

Challenges

Despite its success, Costco is embroiled in many challenges that it needs to overcome to remain as one of the leading retailers across Canada and globally. The company has not been able to completely solve the problems and challenges it has been facing since 1996.

One of Costco’s nightmares is the idea that many consumers are shifting to online shopping. The death of physical retailers is likely to deepen further given the emergence of many other retailers who have invested in online shopping the likes of Amazon. A shift of consumers to shopping online has a falling out of Costco’s habit, and there is the need for it to increase its online presence to keep up with the major and emerging online retailers that are offering a significant competition.

Another problem is its business model houses a couple of problems. One of the challenges it faces on its model is membership where the company over depends on its members’ bulk purchase, a trend that could change with time because there is a shift by its loyal customers and bulk purchasers to competing retailers like Walmart’s Sam’s Club. The costs and discounts are a bit similar, and the only difference is the selection in that it is consumer-tailored. There is a likelihood of change in consumer preferences, and that could affect the company negatively due to its dependence on the warehouse approach. The model is challenged by Omni channel an experience that is being adopted by many retailers with Costco having less online presence hence a blow to its customer base because many are moving online.

Last but not least, the company is sandwiched among competitors that are emerging and have been in the market for some years now. Some of the key competitors include but not limited to Amazon, Walmart’s Sam’s Club, Home Depot, Kmart among others which offer same services, same price or relatively fair. These are some of the challenges among many others that Costco is facing in its pursuit to regain its control in the market.

Process

The most crucial part of the operations of a business organization is the process followed by it. It provides an outline for each and every task such as what, how and by whom it has to be done. It is directly linked with the performance and efficiency of the operations. The Four V’s of operation management – Volume, Variety, Variation, and visibility are of great significance and therefore an integral part of any business process. Mostly all the businesses operate under the same criteria but they vary in terms of Four V’s as per the type of business. There are two ways of interpreting the Four V’s one is according to the product in stores and the other is considering the number of customers in a store or business.

Our team visited the Surrey Branch of Costco, to do this operational analysis. Our findings and analysis is described below:

Volume

Costco is a known for selling in wholesale and volume is a key to how they organize their business. Everything is sold in bulk or packs which help Costco to sale more and satisfy their customers as they are getting more volume of product at a cheaper price. Potential buyers for Costco are small businesses and large families. Basically, high volume means satisfying a higher level of customers. For the volume of customers in Costco, every one minute on an average 9 to 10 customer enter in Costco, which clarifies the fact that volume in high is Costco.

Variety

The second V is Variety which basically means the contrast between products i. e. providing customer with more than one option to select. In this manner, Costco offers a number of products with a similar genre. More variety in product means higher unit cost but for a retail industry, it may vary. From a customer point of view, it is quite different. For example (observed at Surrey Costco on 6th May) in the electronics department in Costco especially in wireless speakers department they have more than 9 brands which show that Costco offers a high variety of products. It is the same in other departments such as bakery, clothes, dairy, etc. There are only a few products which are low on variety and the reason for that is the in house brand of Costco (Kirkland Signature) which provides high quality at a very low-cost. Except for products produced by Kirkland, Costco is high on variety and give plenty of choices for customers which increases the customer satisfaction.

Variation

“Variation is change in demand” (Dharmasiri, 2011). There are number of factors which affect demand in Costco. The main reason behind this is seasonal effect because in winter, the demand for products is different than summers. Variation also considered as arrival of customers on different time of days and week. For example (observed at Surrey Costco) on May 4th Saturday the number of people arriving was much higher than on May 6th, the reason being is weekend. In morning time (9 am to 12 pm) the average number of customers entered per minute was around 6 people but this number started increasing after 12 pm and increased even at a higher rate after 3pm. The peak hours for Surrey Costco are between 4 pm to 6 pm and the number of arrivals tends to be much higher during this particular time period. The other factor which influences the demand for the product is the location of the business. It is also affected by the local community and surroundings. The culture and festivals celebrated by local people can increase or decrease the demand for products and result in variation. For instance, Costco in Surrey is widely influenced by Indian community and culture, hence there are some products and items which can only be found in surrey Costco rather than any other Costco in the lower mainland or Vancouver.

Visibility

Visibility is how the customers experience the service, and how much is the process easy for the customers to follow. It is also considered as the visibility of the product getting clear information about the product. From a product point of view, Costco is large in space despite the fact it has an old infrastructure people can see a product from distance clearly. Everything is divided into departments and each department has its own number so it is easier for customers to find products. Costco also have its website from where customers can buy and see new products and offers. On stores, Costco provides on hand support and information about products. Costco also provide customization option in some departments such as bakery and electronics. Customers can change their mind about not buying a product at any time of the process. As a matter of fact, the customer can return the product whenever they want as long they have their receipt even if the product is broken or used. These factors show that Costco has high visibility for products and in customer service

In short we can summarize that Costco is high on Volume and Visibilty, moderately high in variation of demand and relatively less high in variety This process is also very helpful for the inventory management and ordering accordingly so that they can have the least storage cost. .

Layout

Layout has a very vital role in performing the several operations of an organization and enhancing the service performance as well. Layout is basically the structure of the organization, how it looks like and how effectively the available space is utilized and where the several things have been organized. In simple words we can say it is a kind of Floor Plan of the organization. As per the Operations Management, basically there are the following types of layout, such as Fixed Position Layout, Product Layout, Functional Layout and Cell Layout. As we have observed by visiting there and talking to the Manager as well, Costco, King George, Surrey has the cell layout for all the departments.

In the meeting session, the Assistant Manager also told us that there are 4 fire exit doors in Costco Surrey branch at each of the corners of the building to enhance the safety control, which is a positive point in its layout. Apart from this, they also have placed fire extinguishers and pull stations at several places for the unforeseen circumstances.

Considering the number of departments, Surrey Costco is doing a great job in utilizing the available area in the most efficient way. There are several departments namely- electronics, jewelry, bakery, produce, deli, frozen food, dairy, fashion (garments and shoes), daily use goods department, pharmacy, optical center, sea food, photo center, merchandise pick up department, membership department and returns department. Apart from all of these departments, it also has an in house food court from where we can get fries, poutine, pizza, ice cream etc. and it works on a Self Service Model. There is also one more department which is just on the right side of the entrance gate (i. e. on the outer side the building) which is call tyre installation department.

As per the above layout plan of Surrey Costco, there is only 1 main entrance and 1 exit in the store and the loading bay is at the back of the building. As the products are being organized in a way that they are easily visible by customers because they are in large volume as Costco deals in wholesale. The potential customers of Costco is small business organizations and large families, it doesn’t mean that no one else can buy products from Costco. It works on a membership based business model, anyone can get the membership and buy products.

The very first department which is just next to the entrance is the electronics department. The new thing we came to know from the manager was that, the things we have selected to buy from electronics department, after the payment, we can get that from another department only, which is called Merchandise Pickup, which is next to the cash counters. The second department is the Jewelry department, then Frozen Food, then Produce department at the right end of the building and then Bakery, Deli and Dairy department. From this layout setup we observed that the things which are the daily needs of the customers such as Produce and dairy, are just at the end, so that the customers have to go all the way till the end of the building to grab those items and which can also attract the customers towards more products, which will further increase their sale. This is one of best strategy that Costco is using the increase the sales of all types of products. There is a separate department for the discounted items also, so that the customer can go to that department and can have the benefit of the daily special offers. Apart from this, there is a self-service food court as well, which has 1 different cash counter.

There are total 15 cash register is Surrey Costco (except the food court one), all of them are not opened all the time. Around 7 to 8 of them are opened during the day time because there are less customers in that time. Their peak hours are at the evenings and at the weekends and on those particular time periods, they usually open more cash registers as per the number of customers waiting in the queue. One more thing that makes Costco unique from other stores such as Walmart and Save on foods is that, in every cash register there is one assistant with the cashier which helps in packing the products and put them in the bags to save the time of Costco as well as of the customers. This helps in reducing the throughput time and increases the number of customers being served per hour.

The major drawback of the process layout of Costco is that there are no Self Checkouts in the stores. Sometimes the customers have to buy fewer products and he still needs to wait in the queue which increases the throughput time. If Costco can install 5 to 8 self-checkouts, it can reduce their bottleneck which is at the cash registers and can reduce the throughput time. Ultimately, we can say that Surrey Costco, has a very good layout design which helps in the smooth flow of all the operations and enhance the service performance.

Service Performance

To measure the service performance of the operations of a business organization, we take into consideration four elements, namely – Throughput time, Cycle time, WIP and Resource Utilization. In order to measure the efficiency of operations of Surrey Costco, we have collected data by visiting the site and noting down the observations. The results are as follows:

Throughput Time

According to Heizer et al (2017), throughput time is “the time required for a unit to pass through the process”. It is an imperative system in the Operations Management. It is the most significant method used to know the performance of the operations of an organization. It is used to know the company’s service system that how much time is takes to provide the service to the customer. For instance, in Costco, they provide the service to 28 customers in one hour.

Cycle Time

“Cycle time is average time between completions of the units”. Cycle time is the most crucial element of measuring the efficiency of operations and performance of a company, If the cycle time is more, it means the company needs to make some significant changes in its processes and layout. For instance, in Surrey Costco, they usually take 2. 1 minutes to deal with one customer. Therefore, in one hour they provided the service to 28 customers and on an average they scanned 50 items in one minute.

Calculation of Throughput Time and Cycle Time in Costco

When we visited the store, we observed and calculated the time and found that they have total 15 cash counters out of which, only 8 cash counters are opened usually but in the busy hours, they open all the cash counters. It all depends upon the number of customers waiting in the queue at a particular point of time. They serve 28 customers in one hour and the customer waiting time is between 5 to 6 minutes. If 6 customers are waiting in the line, one customer billed out within 2. 1 minutes.

From this information we calculated the Costco’s Throughput time and Cycle time

Cycle time= 2. 1 minutes because one customer is served in 2. 1 minutes and billed out.

Number of people served=28

Time taken = 60 minutes

Cycle time = Time available / Numbers to be produced

Cycle time = 60 minutes / 28 = 2. 1 minutes

WIP = 6 because 6 customers wait in the Queue

Throughput time = WIP x Cycle time

= 6 x 2. 1 = 12. 6 minutes

Therefore, Cycle time is 2. 1 minutes and Throughput time is 12. 6 minutes

Resource Utilization

The resource utilization or the capacity utilization is the capacity of the process which is actually used. For example: A cashier has the capacity of serving 20 persons per hour, however he only got 15 in one hour. Therefore, the Utilization rate is 75 percent, which means the cashier is idle for 25% of his time.

Utilization Rate = Throughput rate (Capacity Used) / Capacity

Why it is important to calculate utilization rate?

According to Kenton (2019), it is necessary to calculate the utilization rate to access the company’s current operating efficiency. Also, this is important for the company to decide their cost structure for the long and short term. Higher the utilization rate, better the performance. If the company has the low utilization rate it is matter for the concern, because it is affecting the cost to the company, and probably company needs to update their policies.

Work in Process (WIP)

Work in Process (WIP) or Wait in process, is referred to the goods that are in process. It can also be considered as the number of customers which needs to be served or number of people waiting in the queue to be served at a particular point of time. In retail industry, WIP is the number of customers waiting for their order to get billed.

Calculation of WIP and Resource Utilization

From the observations of our team we have calculated the WIP and resource utilization as follows:

There are total fifteen cash counters in King George, Surrey branch of Costco and out of which 8 are working most of the time. The time for the one customer is nearly 5 to 6 minutes, in which there are more than 50 items which were need to be billed. The number of customers which were waiting in the line is 6. Therefore, the work in process is 6, because average number of customers waiting in the queue is equal to 6.

The utilization rate for each cashier individually is 100%, because cashier is busy all the time. However the utilization rate for all the cash counters is 8 / 15 which is equal to 53. 33%. Hence, the utilization rate is 53. 33%.

At last we can say that, Surrey Costco has a very good and effective layout plan. There are number of factors that affect the efficiency of processes and performance of a company which needs to be taken into consideration. Although there are some drawbacks of the process layout of Surrey Costco such as there are no self-checkouts but still it has an impressive process and layout design in context of the four V’s which has increased there service performance.

References

  1. Butler, R. A. (2019, March 12). 4 Problems With Costco’s Business Model (COST). Retrieved from https://www. investopedia. com/articles/markets/011216/4-problems-costcos-business-model-cost. asp
  2. Dharmasiri, A (2011, July 18). Pondering on Processes: A Case of Four V’s. Daily FT. Retrieved from http://www. ft. lk/columns/pondering-on-processes-a-case-of-four-vs/4-39555
  3. Heizer, J. , Render, B. , Munson, C. , & Sachan, A. (2017). Operations management: sustainability and supply chain management, 12/e. Pearson Education.
  4. Kenton, W. (March 27, 2019). Capacity utilization rate. Investopedia. Retrieved from https://www. investopedia. com/terms/c/capacityutilizationrate. asp

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