Tuesday, September 10, 2013

Costco's Strategy for Avoiding the Bullwhip

A primary concept of effective inventory management is balancing the cost of holding inventory with the costs of stocking out. Wholesale superstore Costco seems to have nearly perfected this balance. It was one of few corporations thriving during the recent Recession. Many factors contributed to this success including its pay-to-play membership structure and the relatively low number of unique items the store carries. Yet arguably it was another component that led to its success: it shares detailed inventory and sales data with its brand suppliers. These suppliers, in turn, are responsible for stocking the product on Costco's shelves (which Costco pays for thirty days after delivery). This "vender-managed inventory" eliminates the potential for a bullwhip to develop as suppliers can make accurate orders to replenish the stores stock. Costco is incentivized to provide timely, accurate data to its suppliers and suppliers are incentivized to reorder appropriate quantities of Costco. Additionally, both companies benefit by having a more reliable system to keep products on shelves for consumers. 

This close relationship between large distributors and suppliers will likely emerge in the supply chain strategies of other retail giants in the future. How will this effect the supply chain decisions of smaller retailers how lack this detailed information? Will the costs associated with supplying smaller stores or chains rise to compensate for this?


Minding the Store: Kimberly-Clark Keeps Costco in Diapers, Absorbing Costs Itself --- Under New System, Supplier Stocks Retailer's Shelves And Boosts Bottom Lines --- Averting a Huggies Squeeze
By Emily Nelson and Ann ZimmermanWall Street Journal. (Eastern edition). New York, N.Y.: Sep 7, 2000. pg. A.1

Costco's Artful Discounts
By Jena McGregor. Bloomberg BusinessWeek Magazine. October 8, 2008. http://www.businessweek.com/stories/2008-10-08/costcos-artful-discounts. 

Costco's Unorthodox Strategy to Survive the Big Box Apocalypse. 
By Ashley Lutz. Business Insider. March 7, 2013. http://www.businessinsider.com/costcos-unorthodox-business-strategy-2013-3?op=1.


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