a. Include discussion of how each component impacts profit generation.
i. Volume purchasing: cuts purchasing costs from manufacturers, allowing Costco to pass savings to members through bargain pricing; this component feeds directly into efficient distribution and reduced handling strategy.
ii. Efficient distribution: bypass traditional distribution channels, purchasing directly from manufacturers and routing products either straight to the store or to one of the 9 cross-docking stations. Once products arrive at a docking station, they are placed in a combined shipment; therefore maximizing freight volume and handling efficiencies.
iii. Reduced handling: upon delivery, the majority of shipments are placed directly on the sales floor stacked on pallets. This reduces the need for off-floor storage as well as shelving accommodation and handling. Limited selections of only high-volume sales items (in regard to size, color and model) further reduce handling and increase efficiency.
iv. Rapid inventory turnover: high sales volume is generated through bargain pricing method; accordingly, producing profits before vendor bills are due, allowing Costco to take advantage of early-pay discounts. Thus, a large percentage of Costco’s merchandise inventory is able to be financed through payment terms defined by vendors (rather than a sizable working capital).
2. Describe Costco’s strategy: “The cornerstones of Costco’s strategy were low prices, limited selection, and a treasure-hunt shopping environment (CMU, 390)”.
a. Identify strategy elements; include specifics that communicate how Costco employs each element & what each is designed to accomplish.
i. Pricing: items at Costco are always priced at bargain levels, providing a significant savings for members. Costco has a policy to cap brand name mark-ups at 14% and private label products at 15%. By maintaining a low-price strategy, and continually cutting costs for members whenever possible, Costco has developed a sustainable pricing strategy based on their commitment not to be undersold.
ii. Product selection: each store stocks approximately 4,000 items, about 3,000 regularly available products and the remaining 1,000 is considered “treasure-hunting merchandise”. The selection of regularly available items is limited to fast-selling models, sizes and colors. My maintaining a smaller stock of select items, Costco effectively simplifies inventory processes thereby increasing efficiency.
iii. Treasure-hunting merchandising: The ¼ of the product inventory which constantly changes is made up of special buy “one-time purchase” items. These are usually high-end brand name items with larger price tags ($2,000-3,000). The limited supply of treasure-hunting merchandise is intended to instill a sense of urgency in the customers, knowing it probably won’t be there on the next visit.
iv. Marketing/advertising: due to the nature of Costco’s business model, large-scale advertising and sales campaigns are unnecessary; conversely, most of the advertising is achieved through word-of-mouth from existing members. Marketing and promotions are generally...