Co-Innovation Story 003. Costco Wholesale, Innovate Bakery business with SAP
For the keynote of the SAP’s largest conference, SAPPHIRE Orlando in 2018, Jeff Lions appears on stage, who is the senior vice president of fresh foods, Costco Wholesale in US.
Save 100M$ of bakery goods every year!
The Costco Bakery division, which has been forced to lose $100 million each year over the last few years, has been able to innovate in-store production forecasts to prevent most of the losses, and he has shared the experience.
Costco operates 500+ bakeries in stores throughout North America, with sales of more than 1 trillion won (1b $) per year.
However, to abide by Costco’s policy of ‘keeping the shelves always full’, 10% of bakery products were wasted due to overproduced goods. Of course, the leftover breads are donated to food bank, which helps to fill the poor children’s belly.
Manual forecast with human expertise causes wastes of overproduction
In Costco, every bakery has a weekly production plan. Each Sunday, the baking team creates the forecast for the upcoming week comparing the forecasts of the past week with the actual sales at spreadsheets. It relied on the expertise of bakery manager with seasonal operations experience, and overproduced bakery foods to fill the shelves, 10% of which has been destroyed over and over.
It has been a common problem in the bakery business but has not had the skills and specific solutions to deal with it and has taken $100 million in financial losses per year. However, Costco was able to drastically reduce the losses through the co-innovation with SAP.
Design thinking to listen to the customers
SAP’s first job with Costco is to define on-site issues and improvement directions through Design Thinking workshops with employees working at bakeries. The task force team visits the main stores, and observed forecast meeting, and the interviews with the staff were conducted.
Through a number of design thinking workshops, bakery visits and user interviews, the team found that the issue of Costco was not just a level that could be solved by improving the operational processes in the supply chain. It needed to collect and analyze environmental data which has rapidly changed, and apply to the operational processes in real-time
Examples of the various environmental data for understand customer demand:
- History of 7 years of baked goods sales
- Weather forecast modeling for the week at a particular location,
- Local events information like sports games, local festivals, public holidays.
Defining the detailed requirements of the platform on which these data can be analyzed, what interfaces the platform will have with other systems, and how the mobile app will be used by bakery managers, the basic idea of implementation was shaped through Design-Thinking.
Reduce development time in Co-Innovation with SAP
Next, the team brings the expertise from SAP, which includes SAP Industry Solution Retail, Customer Activity Repository, and In-memory SAP HANA platform for real-time data processing. It just adds some new processes / services based on the best practices from SAP, and connect them with the existing legacy in order to develop a prototype of new Bakery forecast
The project is fast–paced, with leveraging all the existing industry experience including Solution (Digital Consumer Supply Chain), end-to-end processes, and a robust development methodology that SAP has been constantly improving for the last 45+ years
Through its six–month short period of time, Costco has been able to develop a precise Bakery Forecast application in collaboration with SAP
If it has a partnership with a company that offers cutting-edge technology solution or service without the expertise in Retail industry, it is hard to achieve this kind of amazing result.
“Outperform on key measures of waste and productivity”
In collaboration with SAP, Costco has achieved a digital transformation that can prevent financial losses of $100 million per year, and SAP has also created a joint innovation by further gaining a new best practice (Retail Zero Waste) in the retail industry.
Tommy Hughes, Director of Costco Bakery & Food Court mentioned “Initial results have shown pilot bakery to outperform peer group on key measures of waste, productivity during evaluation period, compared to previous year’s performance.”
Hear from the customer, Jeff Lyons
(See the full testimonial video here)