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.