The effective management of the Costco supply chain is one of the reasons why the brand has been successful. However, there are some problems that the company needs to effectively solve. These Costco supply chain issues could have a negative impact on the company if not properly managed.

Costco is a wholesale club store that specializes in selling bulk quantities of merchandise to club members at deeply discounted prices; this means the individuals pay an annual membership fee to the company. In turn, they can make purchases at the company’s outlets at discounted prices.

The primary merchandise sold by the brand includes electrical and electronic appliances, furniture, beverages, and groceries. They also sell restaurant supplies and equipment, office and janitorial supplies, disposable plates and cups, and apparel.

The brand operates warehouse ancillary services alongside its merchandise business. These ancillary services include hearing aid centers, gas stations, tire installation, pharmacies, food courts, and optical dispensing centers.

Costco operates business centers and travels. Although the business centers are open to all Costco members, they are more focused on serving small businesses such as campus stores, restaurants, and convenience stores. Most business centers also have a print & copy center which provides professional printing services.

The travel aspect of the brand organizes cruises, vacations, and other travel plans for members. It also provides a platform for purchasing travel items, car rentals, and accommodation.

This warehouse club was established in 1983 by Jeffrey H. Brotman and James D. Sinegal. Costco merged with Price Club in 1993 to become PriceCostco. They rebranded as Costco Companies Inc. in 1997 and later renamed as Costco Wholesale Corporation in 1999 which has been maintained till date.

The brand refers to its retail stores as warehouses and employs about 304,000 people. As of August 24, 2023, the company has about 860 warehouses scattered across the United States, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Puerto Rico, Taiwan, Spain, China, France, Iceland, New Zealand, and Sweden.

Costco is the world’s largest retailer of organic foods, choice and prime beef, wine, and rotisserie chicken as of 2016. It is also the 2nd largest retailer in the world and the 7th World’s Most Admired Company as of 2023.

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The supply chain of any business corporation outlines all the steps that aid the production of goods right from the sourcing of raw material until the final delivery of the product to the customer.

In the case of Costco, its supply chain strategy is straightforward from sourcing to sales in its warehouses all over the globe. It however involves a considerable number of product manufacturers and freight companies.

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Unlike other retailers that get their supplies from product aggregators, Costco purchases its supplies directly from the product manufacturers. This means that the brand is able to save money and negotiate the best possible prices for the products it sells.

Some brands commonly sold at Costco warehouses include GreenPan, PepsiCo, Orgain, Vinotemp, Apple, Highkey, Changshan, LG, Briggs & Riley, The Bread Gal Bakery, Naturade, and Titan. They also sell Body Glove, Travelpro, Ecoflow, Jupiter Bike, Anker, Fitcrunch, CaseMate, Nomatic, Klymit, and Waterproof products.

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Costco’s supply chain process and strategies

1. Sourcing and procurement
2. Manufacturing
3. Costco depots
4. Freight
5. Warehouses
6. Costco logistics

Sourcing and procurement

The Costco supply chain process begins with the sourcing and procurement of merchandise in the different categories available in the warehouse.

These categories include essentials, electronics, furniture, and appliances. Essentials include supplements, baby products, apparel, and groceries. Electronics comprise computers, televisions, audio devices, and other electronic items. Furniture includes mattresses, sectional sofas, patios, and gazebos. Appliances comprise dishwashers, air heating and cooling systems, washing machines, refrigerators, and other large appliances.

These products are purchased from the wide array of suppliers that comprise part of Costco’s supply chain process.

Some of the brand’s suppliers such as General Mills, Procter & Gamble, and Mattel have worked with the company for years. Otherwise, the company has a frequently changing inventory and is known for carrying products for a time, then discontinuing them or using them as seasonal products.

The changes in suppliers mostly arise due to an inability of the brand and the supplier to reach an agreement on price. Costco has positioned itself as a high-quality and low-cost warehouse club. Its low pricing strategy is one of its competitive advantages. Therefore, the brand strives to obtain products from suppliers at low prices so that it can equally sell at low prices to its club members.

Another strategy that aids in keeping the prices low is the limited brands that the company stocks. For instance, while regular retail stores stock as many as 140,000 distinct products, Costco warehouses only stock about 3,700 distinct products. This gives the company more leverage and the ability to closely monitor the quality of the products they sell.

Manufacturing

Although Costco is primarily a retailer, it is an example of companies with vertical integration. This is because it has partly ventured into manufacturing through the Costco wholesale industries.

This division of the company is involved in the processing of meat, special food packaging, jewelry distribution, and operation of optical laboratories.

Costco meat production plants process organic raw ground beef, frozen hamburger patties, and ground beef chubbs. They also produce ready-to-eat hot dogs and meatballs.

Another way that Costco’s supply chain strategy handles manufacturing is through partnerships with other manufacturing companies. Through these merchant partnerships, certain products such as coffee, pet food, and clothes are produced specifically under Costco’s private brand, Kirkland Signature.

The Kirkland Signature was introduced in 1995 and derived its name from the location of the brand’s first headquarters in Kirkland, Washington. Prior to the introduction of this private brand, Costco had manufactured its products under different names such as Clout detergent, Simply Soda, Ballantrae Wine, Nutra Nuggets dog food, and Chelsea toilet paper.

The introduction of the new name ensured that the brand’s products could easily stand out and be recognized in the market among other teeming products. Initially, only the Kirkland Signature was used on the company’s merchandise but in recent times, some of its products are co-branded along with the name of the manufacturers.

For example, the Kirkland Signature coffee such as the Decaf House Blend Medium Roast, Espresso Blend Dark Roast, and House Blend Medium Roast have a custom roasted by Starbucks stamp on them. This shows customers that the coffee comes from Starbucks, albeit at a cheaper price.

Other manufacturers that produce exclusively for the Kirkland Signature include Keurig, Chinet, Diamond Pet Foods, Jelly Belly, Huggies, Ocean Spray, Stearns & Foster, Duracell, and Borghese Roma.

Currently, the Kirkland Signature has products in the diapers & baby, gasoline, household & kitchen, pet food & supplies, clothing, Health & beauty, grocery, home & kitchen, and organic categories.

Costco’s vertical integration into manufacturing is part of its efforts to ensure that its supply chain process is seamless and more efficient. It also enables the company to continue providing its customers with high-quality products at substantially lower prices.

Costco depots

Another aspect of the Costco supply chain process is its depots. Unlike other retail companies, this brand refers it its distribution centres as depots. This may be due to the fact that they largely operate differently.

For instance, while other companies may repackage products at their distribution centers before sending them to the stores, Costco typically ships products in their pallets to the stores (warehouses).

The brand also utilizes cross-docking in its depots. This generally involves unloading merchandise from suppliers from an incoming truck at the depot and loading this merchandise directly into outbound trucks.

Due to cross-docking at Costco depots, there is usually little or no storage in between the supply of goods to the depots and their transportation to warehouses. Hence, the amount of inventory at these depots is mostly minimal when compared to typical product distribution centers.

Costco operates over 40 depots scattered strategically across the globe to cater to its warehouses. These depots serve primarily as vendor consolidation points and vary in the type of merchandise they handle.

Depots are differentiated for handling different merchandise ranging from dry goods, meat, wet goods, and produce.

Freight

The transportation of products from manufacturers to Costco depots and onward to its warehouses is another aspect of Costco’s supply chain strategy. Based on the brand’s overall business model of keeping overhead costs minimal, and its use of cross-docking at depots, merchandise is usually transported from the depot to the warehouse within 24 hours.

When it comes to freight Costco engages companies that can meet its requirement for efficient transportation in order to ensure timely delivery of products from product manufacturing plants and factories to the brand’s depots and warehouses.

Freight within the Costco supply chain process is a combination of air, water, and land transportation. Thus, the brand works with a network of freight including Averitt Express, FedEx, XPO Logistics, UPS, CaseStack, Rapid Express Freight, and USPS.

Costco is able to negotiate cheaper shipping fees by leveraging its volume and buying power. The brand’s large order quantities and consolidated shipments allow for efficient use of transportation resources, reducing carbon emissions and promoting sustainability.

Warehouses

Warehouses are part of the unique supply chain of Costco. Unlike other retail stores that are strictly for the display and sale of products, Costco warehouses serve a dual purpose as both an inventory storage space and for direct sales to members (customers).

Costco warehouses are big as is typical of warehouses with their sizes ranging between 146,000 square feet to 200,000 square feet. The arrangement of products also takes on typical warehousing stacking with goods stacked in the pallets from which they were purchased from the manufacturer. This is made possible due to the specific packaging requirements that Costco suppliers must adhere to which makes stacking and transportation easier.

Usually, the upper shelves in the warehouse are used for inventory storage while lower shelves are for product display and sales. Costco members typically make their purchase from the warehouse and in most instances, buy the products in bundles straight from the manufacturer’s pellets; these bundles are commonly referred to as a club-pack.

At Costco warehouses, you can find a wide selection of exclusive products all in one place.

They offer groceries, candy, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry, watches, cameras, books, housewares, apparel, health and beauty aids, furniture, office supplies, and equipment.

Costco is known for providing high-quality national and regional brands, with a satisfaction guarantee of 100%

Costco logistics

Costco logistics is part of the last step in the company’s supply chain process. When customers make purchases from the warehouse or online and are unable to transport such products themselves, they can opt for Costco logistics to handle it for them.

The brand offers diverse delivery options which include standard, curbside, threshold, room of choice, white glove, grocery, and appliances delivery.

Each of these delivery options is different based on how much it costs, how long it takes for the member to get the product delivered, and the type of product that could be delivered.

For example, when a member has purchased bulky items such as furniture or refrigerator and chooses the room of choice delivery option, the item will be delivered and set up in the member’s room of choice. It also requires a designated appointment time as well as a signature from the member to confirm receipt of the item.

Similar to the brand’s freight in the Costco supply chain, the delivery of products to members is done by delivery partners of the brand such as UPS, FedEx, and USPS. Costco also does some of the delivery itself through its in-house delivery division, Costco Logistics.

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In addition to the aforementioned, Costco’s secondary services such as food courts, pharmacy services, and gas stations further enhance the brand’s success by promoting and encouraging extra traffic to the warehouses since they are typically built as a section of the warehouse or very close to it.

According to Costco’s Chief Executive Officer (CEO) and director, Craig Jelinek:

Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass dramatic savings to our members.

Craig Jelinek, Costco CEO and director

This means that the success of Costco’s supply chain is due to the various strategies set up and implemented by the company that ensures its smooth functioning to meet the desired outcome of meeting members’ needs.

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Costco supply chain diagram

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Costco supply chain management

Costco’s supply chain management has been highly effective and efficient over the years, aiding the company in steadily growing its membership to over 124.7 million cardholders as of July 2023. This large membership can be attributed to the brand’s ability to deliver exclusive offers, products, and services to its members at highly discounted prices.

One of the ways that Costco manages its supply chain is by ensuring it purchases products directly from manufacturers. This ensures regular availability of products and easier negotiation of prices without extra expenses spent on paying third-party suppliers. Therefore the company reduces the cost that is commonly associated with having third parties in a company’s supply chain process.

Costco’s supply chain management is also made easier through the limited number of stock-keeping units (SKUs) the company has when compared to other product retailers. Typically, a retail store carries between 10,000 to 100,000 SKUs to provide consumers with a wide array of brands to shop from. This is not the case at Costco as the brand only carries about 3,700 SKUs in its warehouse.

The low number of stock-keeping units in Costco warehouses makes the management of its supply chain process easier as the ordering, movement, handling, and arrangement of products take less time than would have been required if they had an extended SKU.

It also means the number of personnel required in Costco’s supply chain process such as category managers will be fewer. This, combined with the few merchants that the company has to deal with makes for an effective supply chain management.

The brand also implements just-in-time (JIT) inventory at its warehouses. JIT inventory entails delivering the right amount of products, at the right time and in the right quantities to warehouses where they are required.

This is done through cross-docking at Costco depots where products received from manufacturers are loaded based on orders and supplied to warehouses. The JIT inventory works side by side with the limited SKUs to ensure that consumer needs are met in the most efficient and cost-saving way.

The simplicity of Costco’s supply chain as well as the no-touch policy implemented by the brand is another cost-saving technique. The no-touch policy minimizes the number of people who handle the products offered for sale at the company’s warehouses. This means that most products stay in the same pallets that they were gotten from when purchased from the manufacturer right until their sale at the warehouse.

Costco’s supply chain management ensures that manufacturers package their products based on specific company standards that ease handling and reduce the manpower required in logistics throughout the supply chain process. The combined use of Costco warehouses as both a point of sale and a warehouse is another cost-saving strategy that minimizes expenses.

These combined factors serve to effectively manage Costco’s supply chain process and make the brand a successful warehouse club.

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Costco’s supply chain issues and problems

1. Environmental and sustainability issues
2. Inadequate labor
3. Global supply chain issues
4. Evolving consumer preference

Environmental and sustainability issues

The increasing environmental challenges such as floods, wildfires, droughts, heatwaves, erosion, and rising temperatures due to climate change have been one of the Costco supply chain issues.

Due to increasing consumer awareness, government rules, and environmentalist’s concern about how various business activities are affecting the environment, multinational companies such as Costco are faced with the challenge of managing their supply chain to minimize the impact of their actions on the environment.

Costco’s supply chain issues related to the environment and sustainability include carbon dioxide emissions, the use of plastics, deforestation, and waste management. According to the company,

Doing the right thing — for our members, employees, suppliers, communities where we do business, investors and the health of our global community — is a driving force for continuous improvement at Costco and creates the foundation of our Climate Action Plan.

Costco

So far, Costco has implemented several initiatives through its Climate Action Plan to tackle the environmental and sustainability issues that occur within its supply chain process.

For example, most Costco warehouses reduce the amount of electricity they use during the day. This is made possible because most of the brand’s warehouses are equipped with skylights that brighten up the space during the day, hence negating the use of power to light up the building.

In the area of waste management and recycling, the brand has been actively involved in championing the education of people and in initiatives that are geared toward the proper handling of waste.

For example, in 2011 Costco collaborated with WeCycle Consulting in a waste diversion program to convert about 70% of the company’s organic waste into superior soil amendments that are used in place of chemical fertilizers.

The company has shown its commitment to the elimination of deforestation within its supply chain process especially as regards the sourcing of certain raw materials such as palm oil, wood/pulp/paper, soy, cocoa, and beef. It has done so by piloting new technologies that promote regenerative agriculture and promote the adoption of sustainable agricultural practices by farmers.

The brand also ensures that it provides adequate information on its efforts in curbing deforestation by providing a list of products and their percentages that are certified by the Programme for the Endorsement of Forest Certification, the Sustainable Forestry Initiative, and the Forest Stewardship Council.

Although the success of implementing its varied commitments toward environmental protection and the sustainable use of resources is dependent on several actors and factors, the brand has not relented in its efforts. This can be seen in Costco’s scope 1 and 2 goals in its Climate Action Plan which include energy supply, energy efficiency, refrigeration, electrification, design and site selection, oversight, and employee education.

Inadequate labor

Costco’s supply chain issues also include inadequate labor, especially within the United States; there have been a record number of available jobs in the country but not enough workers to fill the vacancies. The labor shortage has been especially prevalent for retailers, restaurants, logistics, and other service-related sectors.

The labor shortage is due to combined factors one of which is the rising inflation which is making individuals more unwilling to work in companies whose wages are not up to a living wage.

The increased unemployment benefits due to the recent pandemic have also disincentivized some workers from being willing to work. Additional factors include poor working conditions, requiring a better work-life balance, and expensive childcare.

An additional way that inadequate labor has contributed to Costco’s supply chain problems was through increasing the cost of building a 150,000-square-foot warehouse and fueling station in Longmont from $12,530,953 proposed in November 2020 to $15,024,268 in January 2022.

Apart from the labor shortage, supply chain issues within the building industry as well as the hike in the price of building materials also contributed to the increase in the cost of building the warehouse and fueling station.

Costco has often been praised for providing its employees with higher pay and better benefits than were customary in the field of retailing. This is possible due to the company’s culture of doing the right thing which entails obeying the law, taking care of its members and employees, and respecting its suppliers.

In 2023, the brand ranked No. 3 in the retail and wholesale category of the list of Forbes’ America’s Best Large Employers and No. 25 in the general category. The ranking was based on how willing employers were to recommend their current employers to friends and family.

Between 2018 to 2021, the brand has raised its hourly wage to attract and retain adequate workers. Below is a table trailing the wage increase.

Year	Hourly wage
2018	$14
2019	$15
February 2021	$16
October 2021	$17

The company’s culture as well as its competitive wage has aided it in combating the industry-wide labor shortages and protected Costco’s supply chain from being adversely affected by it.

Global supply chain issues

Costco has also been affected by the global supply chain issues which arose largely in 2019 until now in 2023 due to the global changes in the economy as a result of the Covid-19 pandemic. These problems include raw material shortages, increased labor costs, container shortages, and port delays.

The initial border closures at the beginning of the pandemic meant that goods could no longer be freely transported between countries which resulted in the short supply of a wide range of items across the brand’s warehouses.

The gradual reopening of borders and businesses presented additional challenges due to a surge in demand for products ranging from inadequate vessels for the transportation of products to increased waiting time ranging between 7 to 18 weeks before Costco gets supplies from manufacturers.

An example of how this delayed supply contributed to Costco’s supply chain problems was the late arrival of Christmas trees which made them unavailable in the Christmas of 2021. In Long Beach and Los Angeles, two major ports in the United States, no fewer than 73 ships were queued up to be cleared by port staff. This was an unusual occurrence before the pandemic.

In September 2021, Costco had to impose limits on the purchase of some items including cleaning products, toilet rolls, and bottled water. The move was made due to difficulty in getting products to warehouses as well as customers stockpiling amid fears of a recurring Covid outbreak.

To tackle the global supply chain problems, Costco began making purchases way ahead of time taking into consideration the elongated waiting time brought about by congestion at the ports.

The company also chartered 3 ships in September 2021 which it planned to use the following year to navigate the global shortage of vessels. The ships had a capacity of between 800 and 1,000 containers and were used to transport goods between Asia, the United States, and Canada.

It eventually increased the number of ships to 7 by March of 2022 and the brand’s Chief Financial Officer, Richard Galanti stated that the change enabled the company to meet about a quarter of its annual transpacific container and shipment need. This gave the company some flexibility as it was able to tackle some of the item shortages such as the shortage of cream cheese and also handle the exorbitant ocean shipping rates.

By December 2022, the easing of congestion at ports due to the free flow of vessels between countries, their availability, and the reduction in shipping rates that had previously skyrocketed, eased the supply chain issues. These changes enabled Costco to reduce its chartered ship use and have a ready supply of products at its warehouses.

Despite the global supply chain challenges, Costco still kept recording increases in revenue with $152,703 million, $166,761 million, $195,929 million, and $226,954 million in 2019, 2020, 2021, and 2022 respectively.

Evolving consumer preference

Another Costco supply chain problem is the constant, evolving consumer preferences. The company has prided itself over the years in providing limited and high-quality but cheaply priced products to its teeming membership. The range of products available at Costco warehouses includes groceries, electronics, appliances, furniture, clothing, and more. The warehouse club members can access these products alongside exclusive deals, discounts, and additional benefits.

Although the aforementioned has fostered customer loyalty and repeat business, the brand may be faced with the issue of changing consumer preferences.

One such challenge is the move toward online shopping. Which is predicated on the need of most individuals to save time and also have a more convenient shopping alternative.

Another challenge was that members had to register at the warehouse and have a physical membership card to shop at the brand’s outlets.

Although other retailers such as Target began integrating online sales into their business model as far back as 1999, Costco operated majorly through its warehouses. It was in October 2017 that Costco launched a service that provided a 2-day delivery on nonperishable items. This service was referred to as Costco Grocery.

The brand also partnered with Instacart and Shipt to provide same-day delivery of about 1,700 items including household essentials and perishables to members. This was available for orders of $35 and above. Apart from groceries, individuals could fulfill their prescription and get it delivered through Instacart. Individuals without a Costco membership can also shop from Costco through Instacart.

The brand further simplified the online shopping experience by launching an app that is available on both Apple and Google App Stores. The app offers exclusive app-only deals and allows members to pay with Apple Pay or Google Pay.

The app also negates the need to have a physical card as it offers a virtual option. It also allows members to locate Costco warehouses closest to them. The app additionally has a feature that keeps track of a consumer’s regular purchase so as to make subsequent orders easier.

The company’s partnership with credit card issuers such as Citigroup and CIBC Mastercard allows cardholders to use it as an alternate Costco membership card; the customized reverse side of the credit card contains membership info.

Another way to solve Costco’s supply chain problem of changing consumer preferences is by getting directly involved in last-mile logistics through Costco Logistics. This was made possible by the brand’s acquisition of Innovel in March 2020.

The acquisition has reduced the cost of last-mile logistics for members and sped up the delivery time of big and bulky items such as refrigerators, dishwashers, and furniture. This has improved member experience and aided the company in maintaining a limited stock-keeping unit, especially in the appliances and furniture categories due to efficient delivery of orders.

Costco has also solved the issue of consumer preference by expanding its operations to actively cater to e-commerce. It has done this by increasing the number of warehouses that cater to pickup for online orders. The brand also plans to build a 241,342-square-foot facility in Fresno, California; this will be the brand’s biggest warehouse and will also serve as an e-commerce fulfillment center.

The brand has further built on its e-commerce presence by expanding the selection of brands available on CostcoNext. An online platform where members can buy products directly from the brand’s most trusted suppliers at affordable rates.

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Conclusion

Costco’s supply chain issues include labor shortages, environmental and sustainability issues, changing consumer choices, and global supply chain problems. Despite these challenges, the brand has implemented several management initiatives that allow the brand to flourish.

One key factor that offers Costco a great competitive advantage over other retailers is its low-cost pricing. The company’s pricing strategy has been to mark up the price of its private brand and regular products at not more than 15% and 14% respectively over the cost of production or purchase.

The company has also positioned itself as a provider of premium products at affordable prices through its Kirkland Signature products. This enhances the appeal of the products across a wider demography of customers.

Costco’s supply chain strategy is very lean without third parties and the elimination of multiple-step distribution channels. This ensures that overhead costs are kept at or below 10% of total revenue.

In March 2022, the Biden administration announced the starting of the Freight Logistics Optimization Works (FLOW) under the Department of Transportation. This was in response to the pandemic-fueled supply chain issues where a lack of operational visibility contributed to shortages, ship backups, and other delays.

Flow comprises ports, Logistics Real Estate, Beneficial Cargo Owner (BCO), Intermodal Equipment Provider (IEP), Marine Terminal Operator (MTO), third-party logistics (3PL), motor, rail, and ocean carriers, and other stakeholders who will help in developing an information exchange that can help improve cargo velocity.

As of May 2023 when Costco joined FLOW, there are 56 companies representing the end-to-end supply chain. These companies share shipment data on a daily or weekly basis that is then used to create a tool measuring container demand and fluidity.

Due to all these, the brand continues to enjoy a significant membership and patronage making it hard to visit any of its warehouses on any day of the week without finding the parking lot full, with customers streaming in and out of the store.

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