Costco Project Final Report

The Profit Prophets Jonathan Choi, Chris Ragasa, Kyle Rosemark

Karen Bangs IME 223-02 4 December, 2013

To: Karen Bangs From: The Profit Prophets (Jonathan Choi, Chris Ragasa, Kyle Rosemark) Date: December 4, 2013 Subject: Costco Liquor Department Evaluation and Report EXECUTIVE SUMMARY The goal of this project was to observe the Liquor Department at Costco in San Luis Obispo to see if there were any improvements to be made. Throughout a span of 6 weeks, we visited Costco multiple times to observe the processes done within the Liquor Department. Focusing specifically on the work involved with restocking, we noticed there were three main areas of focus: optimizing floor layout, optimizing the steps within pallet plugging, and optimizing the organization of the wine section. We incorporated work measurement techniques, specifically Direct Time Study, in order to collect the data we needed to determine normal time and establish standard times for the operations. The data also helped us in identifying and finding areas for improvement. After a rigorous analysis of our collected data, it was obvious that there was room for improvement within the organization of stored wine boxes. Through direct observation, we noticed that an implemented color-coding system would make it much easier for the operators to identify the specific wine bottles they intend to restock. The system would involve the morning shift operators to place colored stickers on boxes that correspond to areas in the wine section. This task will add a few seconds to the work of the morning shift operator, but will save an exponential amount of time for the day shift workers as they look for their wine bottles. For the task of pallet plugging, not many changes could be implemented. Under evaluation, the current system was running very efficiently and the only apparent improvement was preventing possible defects (specifically broken bottles and wines spills). To tackle this issue, we proposed moving the step of removing plastic wrapping on pallet to just before the operator places the pallet into sales position. The plastic wrapping then acts as a protective coating as the pallet is moving from one place to another on the pallet jack. Implementing an alternative floor layout could potentially cut down movement time for each of the operations. With the limited space the operator has to work with, changing the orientation of floor pallets would determine which floor layout works best.

SELECT Costco is a membership warehouse club that offers a wide selection of merchandise with multiple locations worldwide. The store located in San Luis Obispo is a part of this chain and is one of the most successful retailers in the area. Costco generally has a huge customer base and each separate store yields successful earnings. Like the other stores, the one located in San Luis Obispo is driven by local residents, but gets an extra boost of success through the sales made with college students living in the area. Costco makes a huge amount of sales every single year with its huge selection of merchandise. According to Eric, Merchandise Manager, Costco has about $13-$15 million worth of product on hand at all times. They are expected to sell $204 million this year, with 6% of total sales coming from liquor. This equates to about $12.4 million and contributes to its yearly average of $50 million more than the Costco located in Santa Maria. Although it may seem like the liquor department doesnt make much money (only 6%), its one of Costcos highest priorities and easily undergoes the most amount of surveillance. With this in mind, we decided to observe tasks of the operators who work in this specific area.

We noticed that the liquor department is one of the most inefficient areas throughout the whole store. Approximately 80% of the store uses a pallet plug system in which old, empty pallets are simply removed with a forklift. After the old pallets are removed, forklift operators plug in new pallets that dont need to be touched up on and are ready to be sold. This also removes the need to hand-stock anything and is much more efficient than the restocking methods practiced within grocery stores. Technically, half of Costcos liquor department (beer and hard liquor) also practices a pallet plug system. Despite these efforts, through direct observation and analysis, our group saw some areas of improvement which we will discuss throughout the body of this report. On the contrary, the other half of the liquor department (wine) was all hand-stocked. It was obvious that we needed to focus on the optimization of these two processes. The whole early-morning restocking process in the liquor department (on a shift from 4am-12pm) is operated by one single person. With this in mind, the operator has a huge amount of tasks to accomplish in such a short amount of time, considering that he needs to be done with raw stocking by 9:45 am. In this report, we break down the different tasks the operator

needs to accomplish. Note that the total time allowed to complete entire restocking process is: 5 hrs, 30 mins. The operator has three main functions throughout the day in terms of restocking: pallet plugging, wine crate hand stocking, and maintaining wine crate volume throughout the day. The summarized and simplified tasks of pallet plugging consists of the operator: 1) finding and identifying the old pallet that needs to be restocked, 2) searching for the new pallet that will replace the old one, 3) using a pallet jack to transport the old pallet to a temporary location, and 4) using the pallet jack to transport the new pallet to the old pallets previous sales location. For this process, we will focus on alternative floor layouts to reduce the amount of distance the operator needs to travel in order to save time. We will also focus on the order in which the operator does things within this process to help prevent defects (broken bottles). The tasks of wine crate hand stocking and day maintenance are very similar. They both involve the operator: 1) finding and identifying the wine crate that needs to be restocked, 2) finding the new box of corresponding wine, 3) filling the empty crate with new wine bottles, and 4) storing the remaining wine bottles in reserved steel space. However, the required maintenance throughout the day typically takes longer than the morning restock. The day shift operator took an average of 40 seconds to find the stored wine box. The morning shift operators primary objective was to stocking as much product as possible in either the wine crates or steel space; searching for a wine box wasnt necessary. RECORD Pallet Plug: Our approach to record the pallet plug was to incorporate a direct time study. We broke up the elements involved in the pallet plug operation into a single cycle. The cycle would start from unwrapping of the plastic to moving and setting down the pallet. We timed a total of 20 cycles in order to attain average observed time, average normal time, and standard time. Below is the data of average normal times of each element. Data obtained from Appendix 2. Unwrap plastic 16.865 Insert pallet jack 1.75 Pump up pallet 6.465 Move pallet 33.875 Set down pallet 2.015

Table 1 Average normal times for pallet plug The average calculated for each work element had a consistent recorded time, however, there was one work element from this operation that greatly varied from cycle to cycle. The moving of a pallet from the current location to the designated area had a range of 15.8 seconds to 45.3 seconds. The lower times were due to our operator, at certain cycles, only having to move a couple of feet in order to place the pallet to the designated area. Wine Section: We conducted a direct time study for the wine section as well. Just like the pallet plug time study, we determined the elements involved for the handstocking of wine operation into a single cycle and timed a total of 20 cycles. We were able to obtain the data and create a direct

time study, see Appendix 2.3. The work elements comprised of cutting the box of wine, removing cardboard slits, picking up box, moving to designated crate, setting down, and finally hand stocking the crates until full. The normal times for the handstocking of wine crates element fluctuated from cycle to cycle. This was due to some crates already halfway full. We observed a time of >50 seconds for hand stocking a completely empty wine crate. Alternative Layouts: Our approach to creating alternative layouts of the liquor department was to work with the dimensions measured and create proposed examples on Microsoft Visio. See Appendix 3 for proposed alternative layouts. EXAMINE Allowances: We determined the allowances prior to conducting our time studies. After observing the operation, we gave an allowance factor to our operator. The allowances include the following: Personal allowance, basic fatigue, bending to reach pallet items, lifting/pushing the hand forklift, and medium monotony. This adds up to a 13% total allowance for the operator. Pallet Plug: Costcos current method of pallet plugging is already based upon lean strategies, and their competitors have a hard time keeping up with their efficiency. Instead of following a traditional method, removing product from a back room or warehouse and hand stocking everything in the store; Costco removes many of the operations in the middle, greatly reducing the amount of time and effort needed to get finished goods into the hands of the customers. Product is removed from delivery trucks very early in the morning already on pallets, then forklift drivers can pallet plug them directly where they will be sold from. Minimal work is needed to arrange the product on each pallet for display, if any at all. Costco negotiates with its vendors to try and receive their product already neatly and densely packed on a pallet, in an effort to reduce work that needs to be done on their end. The system is lean and difficult to reduce much waste in without incredible effort. Therefore, we looked to reduce waste in more hard to recognize areas, such as preventing defects and improving safety.

Wine Section: Costco of San Luis Obispos wine section is one of the few areas in the whole store that does not fully implement the efficient pallet plug system. There are two large rows of wine crates in the section that must be individually hand stocked bottle by bottle.

The manager of the facility told us that this specific section had a priority on display and making the wine seem much more appealing to the customer. Underneath the rows of crates is a small amount of storage space just tall enough for bottles to stand upright in. This space is used by employees during the day to restock any wine crates that are becoming empty or no longer have the organizational appearance that Costco desires. Our focus for improvement in the wine section should be employee changeover and organization between employees. The reserve underneath the crates is stocked by workers during the early morning shift but product is usually only removed from it during evening and later store hours. Floor Layout: The liquor section in Costco is made up of three types of storage space: steel space, floor pallets, and wine crates section making it one of the most diverse in the store. Steel space is all of the area above ground, in large metal scaffolds with semi-permanent locations. Floor pallets are every space where a product will be sold directly off of a pallet, these can be moved around and placed freely. Wine crates may be moved around like pallets, but must not be broken up out of the two large rows for display purposes. 5S Current Observations: We found that Costcos liquor department incorporates 5S practices. A workplace as big as Costco relies on 5S principles in order to be productive and keep the departments in order. We observed the liquor departments current 5S implementation. Sort: The operators in the liquor department currently use Sorting by utilizing shopping carts and platform carts to place trash, plastic and unneeded materials in. Minimal walking and easy access for the operator. Straightening: For Straightening, Costco currently has pallets that are emptied and moved out of the way to prevent any interference with the work flow of the liquor department. However, these areas are random and could block the pathway of other operations. There is always room for improvement in 5S.

Systematic Cleaning: The third S is implemented usefully. Currently, there is a sign placed on the end of the aisle with instructions on how to properly clean a spill. In addition, basic equipment such as gloves, paper towels, plastic wraps is provided for the operators. We also noticed that the floors are mopped and polished regularly, and workers make an effort to remove trash from random areas.

Standardize: In regards to Standardize, the operators are responsible to check to see that pallets are unbroken and clean. They are required to have the products appear straight and uniform. Sustain: Finally, the last 5S is currently set up so that employees are trained to understand the importance of adhering to rules and schedules. There is also a strict schedule on when everyone should come into work because the entire process runs on a chain of events. Costco requires operations to be done by 9:45 AM. Costcos current 5S implementation works well because it keeps the workplace organized and helps with the work flow operation. However, in lean, there are always room for improvement and newer ideas that can improve the conditions of the work environment and the process (See 5S Proposed Implementation). DEVELOP Pallet Plug: Optimizing the pallet plug system appeared rather difficult, and can seem somewhat impossible with the overall simplicity of the task - taking something out, and replacing it with something new. However, breaking the task into elements could reveal any flaws or opportunities for improvement. In order to further analyze and understand this process, we broke down the task into small individual steps and organized it with a flow process chart (see Appendix 1.1 for Flow Process Chart). After weeks of observation and analysis, we determined that their current system of pallet plugging was already efficient. There was much that could be done without changing the whole system in which Costco orders their products from suppliers, which obviously wasnt an option. One thing we did notice though was the order in which the operator removed/cut the plastic from the new pallet before putting it on a pallet jack. During one of our visits, Nick was doing his regular task of transporting the new pallet with a pallet jack to the old pallets sales location when one of the boxes fell off the top layer. The box hit the floor and shattered multiple bottles, causing a huge spill and a loss in sellable wine bottles (see Appendix 4.1 for picture). When this occurred, the whole operation stopped as he had to move all the surrounding pallets and equipment out of the way so they wouldnt get affected by the spill. He swept up and threw away the broken pieces of glass. After doing this he left for a few minutes and came back with a

vacuum machine used to clean up and wash the spill. Once he was done cleaning the spill, he left once again to put the machine away and came back with a mop and bucket to take care of the spots the machine might have missed. After this whole cleaning process, Nick could finally continue on with his regular restocking process. The cleaning process took a total of 20 minutes and 12 seconds. There were two main causes of this spill: pallet ground placement, and the plastic wrapping on the pallet. The pallet ground placement caused the spill because the pallets were unorganized and set down in a way that was hard to maneuver around. This problem could be prevented by simple organizational efforts and is based solely on the operators experience. There is no systematic way to place the pallets as each movement is situational and changes on a day-to-day basis depending on what kind of items come in every morning. However, the plastic wrapping on the pallet was something that could be greatly improved in a relatively simple manner. In the current system, the operator would cut the plastic wrapping from the new pallet before putting it on the pallet jack (refer to Appendix for Flow Process Chart - Present). Removing the plastic before transporting the pallet on the pallet jack greatly increases its chances of falling off and thus causing defects and mishaps. In our developed system, we propose that the operator wait till transporting the pallet to the desired sales location before removing the plastic. We also propose that the operator remove the plastic while it is still hooked onto the pallet jack to prevent any additional steps (refer to Appendix for Flow Process Chart). Even though our proposed solution doesnt cut down the amount of time or distance travelled, it greatly reduces the chances of a box falling off the top layer while in transportation, and thus defects and broken bottles. Wine Section: Originally, we focused on the actual bottle-by-bottle stocking of the wine section. The morning employee unwraps pallets, and unpacks individual bottles and boxes. Soon, we realized that this was a more relaxed task. As in, what the worker is doing is very subjective on what needs to be done. After talking with some employees about proposed changes to this morning wine stocking, such as a more structured approach, we soon came to the conclusion that any improvement in efficiency here would be cancelled out by the work needed to implement it. Our new focus for this section became employee changeover and organization to make the task of restocking wine during the day more efficient for those employees. Boxes of wine are often just placed where there is any space at all under the crates. Time is money, so we wanted to save those employees day restocking wine as much time as possible by making it more easy to find the product they are looking for. The solution we came up with we call a quadrant color system, which will break the two wine rows up into four space-even sections each represented by a color. The way it works is that the morning employees who fill the crates once and make sure the reserve space is full, have colored stickers that correspond to each of the quadrants. As he or she puts a box in this space, all that must be done is place a sticker facing outwards to be seen by later employees. This way, even if a morning worker must place a box far away from where the corresponding crate is (because of the space restraints), their evening counterparts will be able to see which quadrant each box belongs to.

Floor Layout: We spoke to Nick, the primary liquor department operator, and he told us how it was often difficult to stock or maneuver pallets because of the way product is laid out on the floor. We set out to improve both: The amount of movement on average needed to stock or restock an item Maximizing space in between products on the floor to make moving pallets easier (and reduce risk of breaking the product)

Our initial approach was to consider alternative layouts in order to make more floor space for our operators movement. However, the limited amount of current space in the liquor department would not increase by simply making alternative layouts. Since it is not feasible to simply add floor space, we decided to generate alternative layouts in order to cut down on the operators movement time. Two proposed valid layout designs were created to aid in the time needed to stock and restock product, while the third design was an experiment to entirely maximize product on the floor. See Appendix 3. 5S Proposed Implementation: The 5S principles were an important tool that we used while observing the Liquor department. We came up with a few recommendations and proposed ideas to maintain improved 5S conditions in the department. Sort: Our proposal to the 1st S, Sort, was to limit the variation of wine bottles within stored pallets. The idea of sort is to keep only the materials necessary to complete a job within the workspace. Mixing different bottles within the same pallet creates clutter, and makes it harder for the operator to identify and select the bottles he needs to complete his/her work. Increasing the amount of clutter will increase the amount of shuffling in between boxes. When the operator is shuffling boxes around, there is a greater chance of broken bottles (defects). Straightening: We had a couple proposals to improving the current methods of Straightening. When restocking, empty pallets placed on the floor is inevitable; there is always going to an empty pallet somewhere as product is constantly being removed from them. Our first proposal is to be conscientious of other the operations occurring in neighboring departments. For example, Costcos liquor department is neighbored by the bread/pastry department and the food department. Empty pallets were moved from their respective work areas as an attempt to sort, but were sometimes placed in areas that interfered with the work flow within different departments. We propose that a designated area for empty pallets should be established; each department should have an area where operators can place empty pallets.

This will eliminate the random placement of empty pallets, and make it easier for operators to walk around and maneuver within their respective departments. This whole idea also builds a sense of cooperation as each department works and helps one another. Systematic Cleaning: Although Costco practices good systematic cleaning, there is still room for improvement. They currently have a sign providing instructions on how to safely and properly clean a minor spill, but do not provide instructions on how to operate the EC H20 machine (used to clean larger spills). The operators should know how to use the machine themselves, instead of calling for help. Not being able to solve the issue directly wastes time as the operator would need to wait for backup to arrive. Standardize: During store hours, empty boxes should immediately be removed to maintain uniformity. When possible, boxes with an uneven amount of product should be combined so that less total boxes are used. Sustain: To sustain 5S, new workers should be trained the optimal organizational techniques mentioned above. They should also be familiarized with the benefits of 5S and how it leads to a more enjoyable working environment. Management should continue offering incentives for exceptional worker performance and maintenance should always be a main priority! The implementation of these 5S principles will improve the work environment conditions by making it safer and comfortable for the operators. Overall, we found 5S to be an exceptional tool used to maintain order and reduce waste. EVALUATE Pallet Plug: The proposed pallet plug developments arent monumental changes; one involves gradual learning experience and the other involves no new tasks. Even though they are simple, they will still have a great effect on the amount of lost time. Also since we are not implementing any new tasks, operators wont have to learn new skills; the implementation will be easily adaptable. If the operator waits to remove the plastic wrapping until just before placing the pallet in its final sales position, the plastic acts as a protective coat. The plastic will prevent boxes from falling off the top layer and prevent spills and accidents. According to Nick, spills happen at least 3 times a week. Assuming that each spill takes at least 15 minutes (our observed time was 1040 seconds), at a minimum, it would cause 45 minutes in wasted time a week. This is time that could be put into actual value added activities. We have provided the following table displaying the events that occurred during the wine bottle spill, and the amount of time it took to complete the entire cleaning process.

Broken Bottle Cleaning Process Action Time (AM) Cumulative Time (sec)

2 bottles break Nick leaves Comes back with EC H20 Machine Pieces picked up Finish moving surrounding pallets Finish using Machine Grab mop and bucket Finish mopping Resume work

6:12 6:12:30 6:16 30 240

6:18:09 6:22:02

369 602

6:26:05 6:26:10 6:29:05 6:29:20 Table 2

845 850 1025 1040

As we can see from the table above, the whole cleaning process took about 1040 seconds; 1040 seconds from the morning shift were lost. This is a huge chunk of time that could be allocated to value added activities.

Wine Section: The color quadrant system is the simplest method we found to increase synergy between the workers stocking the wine section in the morning and those workers who restock the wine crates during open business hours. It will allow the later working employees to quickly and easily tell which area specific boxes in the underneath storage area correlate to on the crates above. An advantage to the system is that it can work both ways. An employee can find

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which quadrant a box of wine goes to, or he or she can quickly look for a corresponding box if the wine needed for the crate is unknown. Boxes that are stored out of their respective quadrant will stand out a different color, alerting workers that those bottles are stocked in a different area. This reduces the delay that an employee might experience when searching for a wine that may have run out or just needs to be topped-off during business hours. Our proposed method mainly changes the steps of the morning shift operator. This alteration, however, then changes the time taken to complete the steps of the day shift operator. Our DTS allowed us to find the current time taken to hand-stock the wine crates for both day and morning shift operators (Refer to Appendix 2.3). We then used multiple flow process charts to help us quantify our savings (Refer to Appendix 2.1, 2.2). After conducting our studies, we determined that the current standard time for wine crate hand stocking (morning shift) operation was 106.1 seconds. This translates to an average 106.1 seconds to hand stock each crate. Our proposed standard time is 111.6 seconds, as we added an extra step of placing a sticker onto the stored wine boxes. Why would we add 5.5 seconds to our operation? The 5.5 seconds added to our morning shift operation will ultimately save a large amount of time for day shift workers looking for the wine bottles. Stored boxes will be easier to access as wasted movement will be cut down. We have also introduced an organized system for wine storage throughout the day as compared to boxes being placed in random spots. The current standard time for the day shift workers hand-stocking wine cases is 100.3 seconds. The implementation of the color-coding system to the morning operation in the wine section reduces the standard time of the day shift to 78.5 seconds, a 21.8 second improvement. A 21.8 second reduction in the operation throughout the day outweighs the mere 5.5 seconds added to the morning operation. The total net improvement is 16.3 seconds.

Dividing the wine crates into four color quadrants

Floor Layout: For alternative floor layouts, there are three proposed designs. For the first layout, we shifted the two wine crate rows to be parallel with the pallet row so that the floor layout would be consistent. This would improve the operators movement by allowing the operator to move from aisle to aisle easily in a uniform manner. The problem with this layout is that it goes against Costcos policy. The wine crate rows are the way they are for aesthetics purposes.

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Proposed Layout #1 - Appendix 3.2 The second alternative floor layout is designed with two horizontal floor pallets (parallel to the wine crate aisles) rather than three vertical floor pallets. This would essentially allow the operator to move the pallets about the floor more freely. The current layout has three vertical floor pallets with two aisles in between for movement. The proposed layout has two horizontal floor pallets with one aisle in between for movement. The proposed, with one less aisle, will make it easier and quicker for the operator to move from one pallet to the other.

Proposed Layout #2 - Appendix 3.4 The third and final experimental floor layout is one where we only took into account maximizing products on the floor. We were able to squeeze in a few more pallets but at the cost of nearly everything else. Stocking this area would become near impossible; let alone the maze of pallets would trap and probably strand people and shopping carts inside, forcing them to climb or claw their way out over the other trapped shoppers. We included this layout to show how well that the flo or space is already being utilized, and that number of pallets on the floor is not currently an area for much improvement.

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Proposed Layout #3 - Appendix 3.2

DEFINE Pallet Plug & Wine Section: Taking into consideration Costcos currently efficient systems, we decided that our developed solutions were the best options given the resources and time allowed to complete this project. Floor Layout: The second proposed floor layout is the best design to maximize efficiency while under the condition that the wine must be arranged for aesthetics. An advantage to this layout is that the entire grid of product is only divided two ways, middle horizontal and middle vertical. See Appendix 3. This design maximizes the width of the aisles and will allow the worker to move all the way through to the other side of the pallets with minimal turning, while still keeping pallet density at its current high. INSTALL Pallet Plug: The changed pallet plug sequence is the most easy to implement of all our proposed changes. It is as simple as informing the current and any future liquor section workers to remove any plastic wrap from the pallet after transportation instead of before for safety and preventative measure. Wine Section: Also a relatively easy change, the only new materials brought into the process are the stickers for crates and boxes. The system could be fully implemented in a day or slowly worked towards as old product leaves the store, and new (stickered) product replaces it on the shelf.

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Floor Layout: Changing the layout of the wine crates and floor pallets is a one day job. The experienced forklift drivers at Costco would make quick work of any changes needing to be made to floor pallets. The wine crates would most likely need to be completed. MAINTAIN Pallet Plug: To maintain the change in where the plastic is removed from the pallet, any employee training manuals may have to be changed, along with informing those who train new employees of the new protocol. This will ensure that future workers of the company will be educated on the safest way to move pallets in an attempt to prevent any product from falling off and breaking in the aisles. Wine Section: The biggest key to successfully maintaining the color quadrant system is in the hands of the employee who stocks in the morning. It is his or her duty to make sure each box that gets placed in the wine reserve space not only has a sticker on it, but that it clearly faces outward and can be seen from a distance. Otherwise, if this person fails to do this for any box, the whole system loses effectiveness. Floor Layout: The best way to maintain the floor layout is to build the any separate systems around it. The floor layout should also stay consistent so both employees and customers have a general understanding of where everything is located.

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Appendix 1.1
Flow Process Chart Present Method Pallet Plug

Flow Process Chart Proposed Method Pallet Plug

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Appendix 1.2
Direct Time Study Pallet Plug

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Appendix 2.1
Flow Process Chart Present Method Hand-stocking of Wine Cases

Flow Process Chart Proposed Method Hand-stocking of Wine Cases

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Appendix 2.2
Flow Process Chart Present Method Hand-stocking of Wine Cases (Throughout Day)

Flow Process Chart Proposed Method Hand-stocking of Wine Cases (Throughout Day)

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Appendix 2.3
Direct Time Study Hand-stocking of Wine Cases

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Appendix 3.1
Current Layout

Appendix 3.2
Proposed Layout

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Appendix 3.3
Maximizing-Pallets Layout (Experimental)

Appendix 3.4
Proposed (Favored Design) Layout

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Appendix 4.1
Broken Wine Bottles

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Appendix 5.1
Spaghetti Diagram for Pallet Plug

Spaghetti Diagram for Wine Hand-stock

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