Inception, Customization and Benchmarking of COSTCO ANKITA MOHAPATRA NIKITA JOHNSON
Introduction Founded in 1983 Fifth largest retailer in the U.S. As of 2012, 573 warehouses in 40 states and 7 countries Fastest growing company in the history among American businesses
Costco Only company to achieve $6 billion in sales from zero in six years Founder Jim Sinegal coined as the inventor of the wholesale Club concept Philosophy is to “keep members coming in to shop by wowing them with low prices.” Does not engage in extensive advertisements or sale campaigns Five Guiding Principles Obey the law Take care of members Take care of employees Respect suppliers Reward shareholders Creative Exposure Consulting
• Benchmarking is the process of comparing ones business processes and performance matrices to industry bests or best practices from other industries. Dimensions typically measured are quality, time and cost.• In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful.
The comparison is made between Costco and Walmart1 ) lower operating margin2) advertisement3) Policy of James D. Sinegal ,co-founder and former COE of Costco4) Costco doesn’t concentrate on volume5) Turnover6) Shrinkage/Employee theft
1 ) Costco has a lower operating margin Costco keeps around a 3% operating margin,which means for every dollar in sales they get 3cents of profit before things like interest and taxes.Walmart’s operating margin is around 6%, andtarget’s is almost 8%.
2) Costco don’t advertiseIn addition costco don’t advertise in that waysaves 2 percent a year in costs.
3) Policy of James D. Sinegal,co-founder and former COE of Costco Mr. Sinegal’s elbows can be sharp as well. As most suppliers well know, his gruff charm is not what lets him sell goods at rock-bottom prices – it’s his fearsome toughness, which he rarely shows in public. He often warns suppliers not to offer other retailers lower prices than Costco gets. When a frozen-food supplier mistakenly sent Costco an invoice meant for Wal-Mart, he discovered that Wal- Mart was getting a better price. “We have not brought that supplier back,”
4) Costco doesn’t concentrate on volumeA typical Costco store stocks 4,000 types of items,including perhaps just four toothpaste brands, whilea Wal-Mart typically stocks more than 100,000 typesof items and may carry 60 sizes and brands oftoothpastes. Narrowing the number of optionsincreases the sales volume of each, allowingCostco to squeeze deeper and deeper bulkdiscounts from suppliers.
5) Turnover Costco’s practices are clearly more expensive, but theyhave an offsetting cost-containment effect: Turnover isunusually low, at 17% overall and just 6% after one year’semployment. In contrast, turnover at Wal-Mart is 44% ayear’close to the industry average. In skilled and semi-skilledjobs, the fully loaded cost of replacing a worker who leaves(excluding lost productivity) is typically 1.5 to 2.5 times theworker’s annual salary. To be conservative, let’s assume thatthe total cost of replacing an hourly employee at Costco orSam’s Club is only 60% of his or her annual salary. If a Costcoemployee quits, the cost of replacing him or her is therefore$21,216. If a Sam’s Club employee leaves, the cost is $12,617.At first glance, it may seem that the low-wage approach atSam’s Club would result in lower turnover costs. But if itsturnover rate is the same as Wal-Mart’s, Sam’s Club loses morethan twice as many people as Costco does: 44% versus 17%.By this calculation, the total annual cost to Costco ofemployee churn is $244 million, whereas the total annual costto Sam’s Club is $612 million. That’s $5,274 per Sam’s Clubemployee, versus $3,628 per Costco employee.
6) Shrinkage/Employee theftFor example, it had extremely low employeeshrinkage. While the industry average wassomewhere between 2 and 4 percent, Costco’swas less than 0.02 percent. Managers believed thattheir good wages and benefits were the reasonthat employee theft was so low.