ABC Analysis explores or evaluates relationship of antecedents, behavior and consequences. The ABC system provides information to improve the management and operation of ongoing activities. The goal of ABC should be to increase the value of the products or services provided to customers and to increase company profits by providing higher quality or added value to customers at the lowest possible costs (Stock and Lambert, 2006).
ABC works toward improving critical organizational decisions in such areas as “product design and mix” (what to sell and provide), “pricing conditions” (what to charge), “customer mix” (whom to sell), “sourcing” (vendors, in house or outsource, markets), “improvement priorities” (on what areas to concentrate) and “cash management” (where to allocate resources). This analysis is used by Costco Wholesale Corporation, who looks upon themselves as the membership warehouse club that has the capability to sell top-quality food, hardlines, softlines, and other goods usually in a large number or bulk quantity at the lowest possible price.
Costco now has over 457 stores which are situated in most parts of the United States and is still growing. Their success was mainly attributed to their sales volume, good consumer acceptance, generally good services and customer care, and the high product and service value. Furthermore, Costco sells, provides or displays items or products from limited suppliers or from a small number of suppliers. Variety of items is also reduced and this is done to reduce the risk of purchase decision and encourages a consumer to buy such product or service.
ABC analysis provides insights into the costs that go into the products and services that are provided to Costco’s operational forces. ABC provides a baseline assessment required to initiate a successful business process improvement (BPI) program. ABC enables the functional area manager at Costco to quickly identify opportunities for improving a business process that, when reengineered, will have a high payback potential in the form of actual dollar cost savings, increased productivity, or higher output yield.
One goal of an ABC analysis is to quickly identify resource-consuming work activities that are inefficient or redundant, and identify opportunities for reengineering that will produce real dollar cost savings, future cost avoidance, or higher output yield and/or quality. ABC provides managers with a road map that helps them streamline processes and improve customer service. It will also provide them with the necessary information needed to establish prices and rate structures, if applicable, for their products and services.
Costco Wholesale Corporation’s goals are fashioned through the use of ABC analysis. Costco Corporation provides more discounts and cheaper prices to the customers, focusing more on the customer service activities, rather than to the competition. It uses ABC analysis to be able to provide lower cost and greater discounts. Through ABC analysis, the corporation’s marketing style is modified to reduce the overhead cost by reducing fancy outlet designs, taking almost everything to simplicity.
Costco also pays to its workers and employees, giving them good salaries and benefits, resulting to the tremendous low rates of turnovers by its employees and better customer service activities. It is very crucial for Costco’s management to gain knowledge of the type of services their customers most value. Costco management should also know the amount that customers are willing to pay for those goods and services. Invariably, this sort of research will show that all customers do not seek the same thing.
This effort will, in turn, give managers the information needed to conduct an ABC analysis whereby customers can be categorized based upon the profits they provide to the firm. Customer services strategies can then be developed to meet these specific needs. For example, Costco company’s most important buyers, such as the top 20 percent in terms of revenue generation, are included in the “A” group and are offered very high service levels, while the “B” group encompass the bulk of the firm’s customers (the middle 60 percent) who buy less than the “A” group and would be satisfied with somewhat less attention.
Finally, the least important users (the bottom 20 percent) are placed in the “C” category and receive a lower level still. Management at Costco provides their customers the service they desire without spending more on customer service than necessary.
Stock, J. R. , & Lambert, D. M. (2006). Strategic Logistics Management (4th ed. ): Academic Internet Publishers Incorporated.
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