Product Flow, Customer Ordering

Product Flows

Product flows are generally classified in manufacturing companies. In order to identify the product flow for Costco, a retailer, we will look at the process of ordering an item to its delivery to the store. Items are high-volume orders.
Continuous best fits this mold because it generally is highly standardized and automated products with high volumes. This also includes the low amount of variety, where the cheapest product stands out amongst the others. Customers generally purchase in bulk based off price, therefore solidifying the idea that Costco falls into the continuous mold. This allows for Costco to compete in highly price sensitive markets and succeed in its efforts.

Customer Ordering

As a retailer, Costco uses the made to stock (MTS) process. Inventories are collected before customer orders in order to have sufficient inventory on stock. The advantage is that inventory levels are generally high and can be filled quickly, while the disadvantages are that less customization or customer input on which products they desire aren’t possible.
Costco orders products in bulk, a main reason why they are able to sell products at such low prices. Customer input is nearly unheard of in a system such as the one Costco has in place although customers are appreciative of the low prices. Costco could not be nearly as successful with any other method of customer ordering.

Costco Process Characteristics Matrix

It would fall in line with Batch flow.

Suppliers--->Costco Depot--->Warehouses--->Customers

Suppliers--------------------->Warehouses--->Customers

Factors Influencing Process Selection

Delivery, Quality, Time, and Cost are some factors influencing Costco process selection. For high demands such as diapers Costco keeps a two week inventory with delivery lead time of one week, from when an order is placed to when the Costco truck pulls up. Costco offers high quality products at affordable prices and backs up its products with unbeatable merchandise return policy. Costco consider the time it takes to get paid for a product once it gets sold. Costco also try to reduce costs along the supply chain to improve profitability and influence the kind of products and prices they offer their customers.

Mass Customization Adoption Methods

Costco does not make the products specifically for the consumer, they provide various products from their suppliers. In a way Costco already uses some customization methods. Products are held in Costco's inventory until they are sold to the consumer. The consumer buys what they specifically need when they need it, therefore the postponement method is used. If the consumer decides to shop online, their order is placed specifically to their needs and Costco delivers the items to the consumer. These items are not made for the consumer, but the order being shipped is customized to their needs, so the service provided is a modular production.

Costco: Inventory Management

Costco & IRI Team

Costco and data managing partner Information Resources, Inc. (IRI) joined forces in 2004 to create an innovative inventory system technology providing real time inventory information called Collaborative Retail Exchange (CRX). Inventory is monitored and re-ordered as part of this continuous re-order system. This continuous re-order system is used in a market setting in which demand over a period of time is uncertain and fluctuating. Costco adds estimated future demand during lead time (based off past sales) combined with a sales cushion during lead time (which is necessary due to market demand fluctuations) in order to find a reorder inventory point. Once stock falls below that reorder point “R” an order is immediately placed. The quantity ordered is the same amount calculated under the EOQ equation. This ensures a constant amount of stock necessary to meet market demand.

CRX System Data

The CRX system gives certain suppliers access to information such as how many items were sold in the last week and current inventory levels. These suppliers must be approved by Costco before granted access to this private data. IRI offers the service to those suppliers of managing and notifying suppliers that inventories are dangerously close to the reorder point and once they point is actually reached. This system is innovative because its puts inventory management mostly in the hands of the suppliers, whose job is to ensure Costco has sufficient inventory to meet market demand. Suppliers are truly in control of their own inventory. Once an item is scanned and a sale has been completed, the system is automatically updated and inventory managers are notified if inventory levels are nearing or have reached the reorder point. The main goal of the CRX was to improve communication between Costco as a company and its suppliers. Costco decides which suppliers are allowed access to the private CRX data.

Efficiency of CRX

The CRX system allows Costco to use this continuous review system efficiently because without the system, each warehouse inventory manager would be forced to manually count their inventory on hand and input it into the system. This method would be extremely inefficient. The CRX system is undoubtedly one of the many reasons Costco improves its sales figures quarter after quarter. The CRX system prevents downtime and overstocking inventory. This is important because total operating costs are high when inventory is overstocked, as well as Costco losing otherwise earned interested through having a large amount of money tied up in unnecessary assets.

Costco Wholesale: Company Overview

Costco Whoelsale, founded in 1983, is the largest wholesale club operator in the United States according to sales volume. Membership to Costco warehouse stores exceeds 55 million members. The main competitor of Costco is Sam’s Club, which has a higher number of warehouses (600+) yet a lower overall sales volume. Costco focuses on selling items with low-margins (resulting in lower costs than competitors) at high sales volumes. The company also sells its own brand “Kirkland Signature label” in its stores, generally at much lower prices than competitors. The company limits its markups on items to 15%, many of which are much lower than the maximum. Costco strives for customer satisfaction through their low prices, low membership fee ($50/year), and offering the same prices to Costco members online at Costco.com. With expanding to over 555 membership warehouse stores in the United States and 7 different countries, Costco has established a dominant place in the market.