BCOR 3050 Term paper (3)

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Henry Sidwell 11/30/2023 BCOR 3050 Sundar Term Paper Executive Summary: Costco is the third-biggest retailer in the United States, totaling 163 billion dollars in sales in the US market in 2022. Since the products they sell are typically in much larger quantities than their competitors, how they can efficiently predict consumer demand is both complex and astonishing. This paper will go into depth on how Costco manages to forecast its demand for products, given the unique nature of products being sold in bulk in vast amounts. It will go into detail on what system they deploy to predict demand, how they quickly can replenish their products onto shelves, and how they mitigate risk in case of unexpected high demand for products through safety stock and inventory control. Introduction Section: My favorite concept that I learned throughout OSC has to be how a company can forecast the amount of product that is needed to be carried at any time throughout the day, week, month, or year. While it can be fairly simple at a low-level business, with a company at the level of scale of Costco, it gets extremely complex and interesting. With the combination of the large warehouse spaces they have, the bulkiness of the products they sell, and the sheer number of customers that visit Costco daily, Costco not only has to be extremely precise on how they predict the number of sales per product, but they need to have insurance methods in case there are higher fluctuations of demand than expected. Costco’s forecasting system: While it isn’t exactly known what system Costco uses to predict its demand for products, we can make a reasonable assumption (given the scale to which Costco operates) that the majority of predictions are done through Exponential smoothing. Exponential smoothing allows Costco to easily integrate their expected sales volume based on recent months, while also being able to combine their year-to-year growth within it.

As seen in the graph above, Costco Revenue - Quarterly provided by stockanalysis.com, Costco’s highest demand quarters have consistently been the summer period of June, July, and August by a factor of around 20%. While demand is almost certainly predicted on a warehouse-to-warehouse basis, it can be assumed that each store can account for an increase in inventory shipments during those months to meet consumer spending. This graph suggests that Costco may be using a Weighted Moving Average instead of Exponential Smoothing during seasons of high demand. This is because Costco has to account for high-demand periods at a much greater amount. Because of this factor, Costco likely uses a combination of both Weighted Moving Average and Exponential Smoothing to predict their consumer demand. However, regardless of how accurate Costco is at actually predicting how much inventory they need, their unique ways to keep the product and restock it quickly work as a backup system for them. Costco’s ability to quickly replenish products: The first advantage Costco already has compared to its competitors is its lack of variety in products. While this may seem like a disadvantage as it may leave customers with fewer options, in terms of supplying consumer demand, this is a huge benefit for Costco. This article, Inventory Management: How Costco Aggressively Manages Inventory to Thrive in Tough Times, mentions this:“ While the average grocery store carries around 40,000 items, Costco limits its offerings to about 4,000 products, or 90% less!” Costco’s lack of product variety allows them to stock up larger amounts of the same inventory to supplement customer needs. Not only does this small amount of products make meeting demand easier, but allows Costco to analyze their product sales more critically, allowing them to move popular products out at a quicker rate. Another advantage Costco has, to quickly meet inventory demand, is a quite obvious one. Their massive warehouse space (Average Costco in the U.S. is 146,000 square feet). This ability to have so many extra storage rooms for their products, tied with the fact they only carry around 4,000 different products, allows them to constantly be able to restock inventory and keep more excess inventory incoming. Also, since Costco has such strong connections with the retail companies they sell for, Unilever, Proctor & Gamble, Kirkland (owned by Costco), etc., they can “redesign product packaging to squeeze more bulky goods onto trucks and shelves,” (from the article Inventory Management ) to more efficiently store and shelve their items. Costco’s inventory control and mitigation of risk in case of high demand As discussed, Costco can have unexpectedly high demands throughout its day-to-day operations. To supplement this, Costco keeps a safety stock. This allows Cost to essentially have a “buffer” between

the amount of inventory they expect customers to purchase and the amount of inventory that is purchased. This safety stock does three extremely important things for Costco: Increase sales given they’ve prepared for periods of high consumption, satisfy customer needs, and enhance/protect Costco's brand reputation. In addition, Costco can do this all at a lower cost. When safety stock is bought, that means it was a larger purchase, which typically indicates a lower cost, incurring more profit, and so on. In addition to keeping safety stock, Costco can manage and control where its inventory goes throughout the store using RFID tags. First, this allows them to keep track of where their inventory is throughout the supply chain system. If they need a certain type of product and want to check at what point delivery will take place, they can use this to locate the expected time until it arrives in stock. This streamlines their entire inventory system drastically. In addition, it allows them to easily track and move inventory throughout the store safely. All businesses need to account for inventory shrinkage and loss (A broad term for when inventory is stolen, spoiled, etc.). By having access to the RFID trackers, Costco can determine where products are throughout the store and the condition they are in, given the instant ability to locate any piece of inventory. Overall, the addition of having excess safety stock and having entire control knowledge over the placement and location of where their inventory is/goes, allows Costco to profit off additional consumer spending while also increasing efficiency among employees through the RFID tracking system.

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Works Cited ● “ The Biggest Retailers in the U.S.” Visual Capitalist, Visual Capitalist, https://www.visualcapitalist.com/biggest-retailers-in-the-us/ . ● “Costco Supply Chain Efficiency & Sustainability.” DFreight, DFreight, https://www.dfreight.org/blog/costco-supply-chain-efficiency-sustainability/#Demand_Forecastin g_and_Planning . ● “Inventory Management: How Costco Aggressively Manages to Thrive.” LinkedIn, Ameer, https://www.linkedin.com/pulse/inventory-management-how-costco-aggressively-manages-thrive -ameer . ● “World’s Largest Costco Soon in California City." San Francisco Chronicle, San Francisco Chronicle, https://www.sfchronicle.com/california/article/world-s-largest-costco-soon-california-city-182548 99.php . ● "COST - Costco Wholesale Corporation Revenue." Stock Analysis, https://www.stockanalysis.com/stocks/cost/revenue/ .

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