Costco Wholesale Corporation’s Operations Management Evaluation

Introduction

Operations management, with all its fundamental processes and elements, is a core of a company’s growth and industry expansion since its competent and informed implementation provides corporations with opportunities to control and adjust service and product generation, profit-making, and customer satisfaction. The present report is designed to evaluate the existing operations and quality management processes employed by Costco Wholesale Corporation in order to identify potential strategies for pursuing the organizational mission and strategic goals. The analysis of internal and external forces and factors predetermining the organization’s performance allows for generating recommendations for future improvements. The relevance and applicability of specific quality improvement tools will be addressed in the report to justify their benefits for the analyzed company.

Costco Wholesale Corporation is an international enterprise specializing in “the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and through a majority-owned subsidiary in Taiwan” (United States Securities and Exchange Commission, 2020). Being founded in 1976, the corporation has since built a large international community of members who are provided with a range of services and products, including grocery, pharmacy, delivery, gas, pet products, auto programs, photo centers, and others (Costco, 2021).

According to the company’s statement, its mission is to “continually provide our members with quality goods and services at the lowest possible prices” (Costco Customer Service, 2021, para. 1). This mission is integrated into the strategy of the corporation, which is why the membership model is used to ensure a continuous flow of large volumes of wholesale sales for competitive prices.

Overall, the company is one of the global wholesale industry leaders with over 100 million members with member renewal rates ranging from 88% to 91%, and 795 warehouses operating globally in 2019 (Costco, 2021; United States Securities and Exchange Commission, 2020). Its success in its respective industry is validated by the currently utilized approaches to operational management and quality management. Therefore, it is essential to conduct an evaluation of these processes to identify potential advantages and disadvantages for their further use as a basis for improvements.

Evaluation of Success of Existing Operations Management Processes and Quality Management Processes in Achieving Chosen Organization’s Strategic Management

Objectives

The Review of Operations Strategy of Costco Wholesale Corporation Using SWOT Analysis Tool

The review of internal strengths and weaknesses and external opportunities and threats imposed on the company is possible to conduct within the framework of the SWOT analysis. This evaluation tool allows for integrating multiple factors into one system that makes the evaluation fact-based and informative in terms of solutions of the identified challenges and opportunities given using strengths and eliminating weaknesses. The information presented in the diagram (Figure 1) provides detailed information as per the SWOT analysis results.

Figure 1. SWOT Analysis Diagram for Costco Wholesale Corporation.

As demonstrated in the SWOT diagram (see Figure 1), the internal corporation’s strengths and weaknesses are dependent on managerial and strategic decision-making. In particular, the strengths of Costco Wholesale Corporation include the corporation’s extensive and solid presence in the wholesale market both in the USA, where the company was originated and on an international level (Rahman, 2020). Furthermore, the company’s 30-year-long history has allowed generating a positive brand image and a large community of loyal members, whose renewed memberships are the core of the corporation’s profit-making (Chen, 2021; United States Securities and Exchange Commission, 2020).

Notably, as stated by Rahman (2020), “Costco’s ability to attract new customers without costly advertising is one main attribute that makes it one of the best retailers throughout the world” (pp. 17-18). Another important strength of the organization’s strategy is its low prices of products and services, which derive from the wholesale principle of performance and a continuous flow of sales (United States Securities and Exchange Commission, 2020). Finally, a well-developed diversified supply chain is a strong feature of the company since it helps build long-term relationships with suppliers and other stakeholders for sustainable and reliable business handling.

As for the weaknesses, they are bound to the business model of the corporation and lead to a high level of dependence on customers’ membership as the main source of profit. Indeed, to maintain and improve the loyal customers’ membership, the company must make continuous investments and developments. In addition, the corporation provides a wide range of product and service categories with fewer product choices, which diminished Costco Wholesale Corporation’s competitiveness in the market.

Moreover, according to Lim et al. (2021), travel and transportation costs being bound to households is one of the main weaknesses of wholesale clubs’ operations because they diminish the likelihood of customers buying at wholesale facilities located far. Finally, although the company has its affiliations and warehouses in many countries, its overall global presence is insufficient and requires substantial expansion in the nearest future to maintain a high level of competitiveness in the global market.

In terms of the external factors, the threats faced by Costco include a high level of dependence on U.S. and Canada-based financial operations (United States Securities and Exchange Commission, 2020). Moreover, the economic impact of the COVID-19 pandemic has negative implications for the corporation’s operations. Some other considerable threats include an overall unstable economy, strong competition from the side of retailers and warehouse club operators, and online retail advancement.

The opportunities to overcome the threats and use strengths are numerous and have the potential to generate improvements in the operations management at Costco Wholesale Corporation. According to Lim et al. (2021), for warehouse operators, it is recommended to “design assortments and incentive programs to increase households’ propensity to shop at their stores as a function of the distance between stores and households, while maintaining or increasing the store-network densities in the markets in which these retailers compete” (p. 30).

Furthermore, enhanced global presence should be pursued as a significant opportunity for strategic development and competitiveness building. Product range diversification is another opportunity that might solidify the presence of the company in the market and enable its competitive advantage over rivals and new entrants. Finally, Costco Wholesale Corporation should consider digital marketing and online retail opportunities to enhance its positions in the Internet-based environment that has become a driving force of the retail industry in recent years.

Major External Challenges of Costco Operations Using PESTEL Analysis and Porter’s Five Forces of Competition

In order to identify how the environment in which the corporation is operating shapes its business operations management, several tools might be applied. In particular, PESTEL analysis and Porter’s Five Forces tool will be used to evaluate Costco Wholesale corporation’s challenges in the light of external environments. The PESTEL analysis includes the consideration of such six dimensions as political, economic, social, technological, ecological, and legal factors that predetermine the performance of a given business entity (Matovic, 2020). As for Porter’s Five forces of competition, they include “the threats posed by competitive rivalry, powerful buyers, powerful suppliers, potential new entrants, and substitute products” (Dobbs, 2012, p. 22). The application of these two tools is presented in Figures 2 and 3, respectively, to identify the most influential challenges faced by Costco Wholesale Corporation.

PESTEL diagram demonstrates that within the political factors, the most significant challenge is the dependence of the company’s operations on the local political systems of the countries where respiration has its facilities. In particular, “regulatory constraints, currency regulations, policy changes such as the withdrawal of the U.K. from the European Union,” and other issues might affect Costco’s operations (United States Securities and Exchange Commission, 2020, p. 16). Under the influence of the recent COVID-19-induced economic uncertainties, unstable economies globally have been a significant challenge for enterprises, including Costco Wholesale Corporation (United States Securities and Exchange Commission, 2020). Social factors also play a significant role in shaping Costco’s operations management and developmental strategy. Indeed, the changing consumer behavior triggers necessary responses and adjustments in the performance of the company in terms of its pricing strategy, supply chain management, marketing, and other processes.

Moreover, the need for continuous updating of technologies and the application of innovations is a challenge due to the potential loss of competitive advantage in the digital sphere (United States Securities and Exchange Commission, 2020). Environmental issues are of significant concern for large international corporations with a high level of brand image dependence on social responsibility. The company faces challenges in the form of investing in research and development aimed at finding sustainability-directed supply chain actors. Finally, legal issues bound to the political systems of the countries outside the USA might be a considerable challenge due to their unpredictability and uncontrollability (United States Securities and Exchange Commission, 2020). Thus, all the factors ranging from political to legal should be taken into consideration by the management of Costco Wholesale Corporation to ensure its achievement of strategic objectives.

As seen from Figure 3, Costco Wholesale Corporation’s competitive opportunities are dependent on all five forces. Firstly, the level of competitors’ power influencing Costco’s operations is high. The company competes with such retail entities as Walmart, Target, Kroger, and Amazon, as well as such warehouse clubs as Walmart’s Sam’s Club and B.J.’s Wholesale Club (United States Securities and Exchange Commission, 2020). Secondly, buyers’ bargaining power is high due to the dependence of the company’s performance of customer membership. Thirdly, supplier bargaining power is low due to the stability and a wide spectrum of stakeholders engaged in a diverse supply chain. Fourthly, new entrants are of low threat to Costco since the wholesale market requires a long period for building a competitive company. Finally, the occurrence of substitute products is also of low level of threat due to the diversity of product categories provided by Costco. Thus, considering the identified challenges, one should outline possible solutions capable of maintaining and improving the competitiveness of the company and its ability to pursue its mission.

Current and Long-Term Solution to Address the Identified Challenges

The company’s 2020 report demonstrates the overall awareness of the management about the concerns, challenges, and risks that might hinder Costco’s future stability in growth and competitiveness. Therefore, the corporation employs a strategy of effective risk management when outlining the international expansion of its operations (United States Securities and Exchange Commission, 2020). Moreover, the company does “not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” on quality goods – consistently providing the most competitive values” (United States Securities and Exchange Commission, 2020, p. 21). In such a manner, the management aims at eliminating the threat of buyers’ bargaining power by gaining their loyalty and investing in value generation.

As for the long-term solutions that might be proposed for addressing the identified challenges, the company might invest in the advancement of its digital marketing and online retail operations to occupy the digital market and gain a competitive advantage online. Furthermore, it is advised to diversify product range through the initiation of new supplier cooperation to eliminate the threat of new entrants and competitor’s advantage. Finally, Costco Wholesale Corporation should increase the number of facilities available to the customers and intensify international expansion by opening more facilities in Europe.

Evaluation of Operations Management and Quality Control Tools and Techniques as Contributive to Achieving Organizational Objectives and Competitiveness in the Industry.

Cause-and-effect

The utilization of the cause-and-effect quality control tool might be an effective way to ensure Costco’s competitive development. In particular, this approach allows for accurate identification and adequate evaluation of the scope of factors influencing the target outcome. The effect pursued by retailing is choppers’ satisfaction, which is one of the 5 Ss of the newly developed cause-and-effect model (Pal and Byrom, 2003). As seen in Figure 4, the main factors causing the outcome of shoppers’ satisfaction include systems, standards, stock, space, and staff (Pal and Byrom, 2003).

This particular tool might be applicable for Costco Wholesale Corporation’s addressing of the challenges with the dependence on customer membership. Indeed, since the whole operations system is aligned according to the continuous flow process model and is based on members’ loyalty to the brand, the company might adhere to a cause-and-effect tool to control the quality of each of the five factors. In such a manner, the processes inside the company will be aimed at consumer benefits, thus predetermining the core value concentrated in the target population.

Pareto Chart

The application of the Pareto chart for making quality improvements for Costco Wholesale Corporation’s operations management might be a beneficial procedure due to the advantages of this tool. In particular, the Pareto chart allows for grading and prioritizing the problematic areas identified in the company’s operations, thus providing an opportunity for effective problem-solving with the priority set on the achievement of the organizational objectives. The elimination of challenges in the form of growing competition, undiversified product range, an underdeveloped online segment of the company’s operations, and the threat of new entrants’ occupation of the market, as the most significant problems, is the primary objective of the company. Therefore, prioritization of these problems using the Pareto chart will help Costco approach them effectively and steadily on the basis of an objective quality evaluation.

For example, when addressing the threats and the level of their effect in Procter’s Five Forces analysis, the company might utilize the Pareto chart to prioritize the identified issues. As shown in Figure 5, the bars represent the intensity of the challenges’ impact on the overall performance of the company. Thus, the company might benefit from the use of the Pareto Chart when handling the control over the addressing of competitive challenges in the market.

Lean Six Sigma

Another beneficial tool for quality control that might provide improvements for Costco is Lean Six Sigma. According to Snee (2010), Lean Six Sigma is a “business strategy and methodology that increases process performance resulting in enhanced customer satisfaction and improved bottom-line results” (p. 10). Therefore, this tool might be applicable when the company strives to handle the economic burden of the crisis imposed by COVID-19. Indeed, since the Lean Six Sigma tool provides an opportunity to reduce waste and ensure efficiency with minimal losses, its application is particularly important in the times of recovery that are currently being experienced by the company. As shown in Figure 6, the objectives integrated into Lean Six Sigma allows for concentrating on bottom-line goals, which are essential for financial stability in times of economic crises.

The improvement of process flow and the reduction of process variations, as well as finding the best operating conditions, are essential in gaining stability and agility during crises. COVID-19 has imposed significant economic distress for both corporations and buyers, which is why it is particularly difficult to maintain conventional operating capacity (United States Securities and Exchange Commission, 2020). However, the application of the Lean Six Sigma tool will help Costco Wholesale Corporation to reduce waste, non-value-added work, and cycle time (Snee, 2010). Thus, this tool is considered applicable and potentially effective for the organization when recovering from the COVID-19 impact.

Benchmarking

The use of the benchmarking quality control tool might be applicable for Costco Wholesale Corporation when expanding globally and establishing competitive advantages in the new markets. According to Shakoor et al. (2017), benchmarking is “a comparative methodology generally applied between competing organizations which providing similar services on the bases of identical performance measures and characteristics” (p. 6686). It has been vastly applied by competing firms when ensuring quality control, product diversification, and the introduction of new services to the industry with the purpose of gaining competitive advantages over the most significant rivals.

Overall, benchmarking allows for comparing separate services, products, or processes to those of the most significant rivals in the industry. For example, to enter the wholesale market of one of the European countries, Costco might investigate and collect data about competitors’ product ranges and apply benchmarking to compare it to the one planned by Costco. In such a manner, the benefits and drawbacks will be comprehensible, quantifiable, and approachable. The organization will be able to adjust its strategic planning for a given market on the basis of informed and evidence-based decisions.

Conclusion

In summation, the conducted evaluation of the operations management of Costco Wholesale Corporation demonstrated the adequacy of currently applied solutions to the identified challenges by the company as well as the abundance of long-term solutions and competitive opportunities. The company is recommended to expand globally to enhance its global market presence and maintain industry-leading positions. Moreover, the advancement of online retail methods and digital marketing is thought to ensure competitive advantages and elimination of such threats as existing rivals’ influence and new entrants.

Furthermore, the company is encouraged to enhance its customer satisfaction through continuous improvement of facility density, delivery, transportation, and product diversification. These and other solutions might be effectively implemented with the application of such quality control tools as cause-and-effect, Pareto Chart, Lean Six Sigma, and benchmarking. The use of these techniques will allow for making informed decisions and well-aligned planning for the sustainable and competitive development of Costco Wholesale Corporation’s operations and the company’s achievement of strategic objectives.

Reference List

Chen, C. (2021). ‘The study on the store image of hypermarkets: an empirical study of Carrefour, Fe-Amart, and Costco in Taiwan’. International Journal of Asian Business and Information Management, 12(3), pp. 205-221.

Costco (2021). Why become a member. Web.

Costco Customer Service (2021) What is Costco’s mission statement and code of ethics?. Web.

Dobbs, M.E. (2012). ‘Porter’s five forces in practice: templates for firm and case analysis’, in Competition Forum, 10(1), pp. 22-33. American Society for Competitiveness.

Lim, S.F.W. et al. (2021) ‘Shopping activity at warehouse club stores and its competitive and network density implications’, Production and Operations Management, 30(1), pp. 28-46.

Matovic, I.M. (2020) PESTEL analysis of external environment as a success factor of startup business. In ConScienS Conference Proceedings, pp. 96-102. Web.

Pal, J. W. and Byrom, J. W. (2003) ‘The five Ss of retail operations: a model and tool for improvement’, International Journal of Retail & Distribution Management, 31(10), pp. 518-528.

Rahman, M.H. (2020) ‘Financial analysis of Costco wholesale corporation: exploring the strengths and weaknesses’, The Bangladesh Journal of Agricultural Economics, 41(1), pp.17-34.

Shakoor, M., et al. (2017) ‘A novel model for benchmarking the performance of retail stores for retail operations using lean manufacturing approach’, International Journal of Applied Engineering Research, 12(17), pp. 6686-6692.

Snee, R. D. (2010) ‘Lean Six Sigma – getting better all the time’, International Journal of Lean Six Sigma, 1(1), pp. 9-29.

United States Securities and Exchange Commission (2020) Form 10-K Costco Wholesale Corporation. Washington, DC.