

## The Death of Costco

### Scott Pivonka

Copyright 2016 by Scott Pivonka

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Table of Contents

Introduction

Chapter 1: The best thing I got at Costco

Chapter 2: Pay to shop?

Chapter 3: Tires are round and black, right?

Chapter 4: Does it get cold in Colorado?

Chapter 5: Fortune favors the bold.

Chapter 6: New beginnings

Chapter 7: Do we want to increase sales?

Chapter 8: Are we adversaries?

Chapter 9: Let's talk about Executive Memberships

Chapter 10: "That could harm my career"

Chapter 11: Sometimes you eat the bear and sometimes the bear eats you!

Chapter 12: The subjective path

Chapter 13: How do you spell D&D?

Chapter 14: If you're under control, you're going too slow.

Chapter 15: Creativity applied has many contexts.

Chapter 16: Apples and Costcos'

Chapter 17: Playing not to lose

Coda

# Introduction

Picture this, you and I have a great idea for a retail venture. We're going to be different than anything the marketplace has ever seen before. We have several ideas, but one is the big hook, we'll make people pay to shop in our establishment.

We talk costs, make budgets, we cuss, we discuss and finally plan to go for it. It's hard, we don't have a lot of money, and we're definitely undercapitalized to begin. We're on a frayed shoestring but committed to great value for our customers. We know, history has proven time and again that people will flock to a great value. We scraped together everything we can and open our first location.

We are all in, and playing to win.

On opening day we are underwhelmed. Not enough customers, but the customers that are there purchase more than we expect. We continue searching for great values and listening to our customers. We have a lot of sleepless nights, we almost miss a payroll, we make adjustments and word-of-mouth begins to work in our favor. The stress is unbelievable, heart pounding, gut twisting, blood in the toilet kind of stress. We almost miss another payroll. We give some employee stock options in lieu of pay. We have several WFIO moments (look it up) an employee makes a suggestion that we can't believe we didn't think of before to get more customers.

We make the adjustments and broaden our customer base. Things start to take off. We decide to open a second location, and a third. We begin to get some press, we are called the most innovative retailer ever and things really get going. Now we have 10 locations, it's very exciting in a positive way. We know now the business is going to be successful. Because we set up profit sharing, and a program to mine the intellectual treasure that is our employees, every single one believes that the businesses is theirs and the ones who we gave stock to all believe they're going to be millionaires, every employee thinks like an owner. As the business gets bigger it gets more complicated, we have never run a big business before and in many ways we feel like kids on the first day of school. We don't know what we don't know.

Like a forest fire makes its own climate, we are creating a new economic climate. Businesses purchase merchandise from us and resell it at margins larger than we charge. But that's what we want, and people are very happy to pay us to shop at our warehouse.

But now the company is getting very big. We need a handbook, we need policies and procedures. Some of our locations are thousands of miles away from our corporate headquarters. We actually have attorneys on staff, we have buyers by the dozen, quality control officers, benefits managers and more administrative people then you can shake a stick at. We believe it's better to centralize all we can. We have people working in the corporate offices who have never worked in the warehouse. They forget where the money comes from.

Now, when an employee has a great idea they're not told to go for it, they are asked what's the policy? The concerns are real and large. What happens if somebody gets sick from our food? What happens if somebody sues us? We begin to realize this huge liability. Innovation takes a backseat to the status quo. It's safer to stand pat.

One day we realize, were no longer playing to win, we're playing not to lose. That is exactly what Montgomery Ward, Sears, K-mart and dozens of other retailers have done once they got it all figured out.

It's entirely natural how we have progressed. We are set for life. We know that the point of diminishing returns is right around the corner if we don't get out of the track we are currently following. Once again, we don't know what to do. In some ways we are paralyzed because to make serious, radical change affects thousands of employees, shareholders and members. By default we pretty much decide to leave this problem to the next generation.... But then we found this book.

# Chapter 1: The best thing I got at Costco

I meet people all the time, and usually get around to asking if they shop at Costco? Most do, or are aware of Costco. Some say they have been there or to Sam's. Whatever they say I tell this story...

What I liked about Costco is that the merchandise changes constantly. I know that frustrates some people. Because of all the change in merchandise, that means that to manage the layout of the building, they move merchandise around. It can be difficult to find what you're looking for. The store likes that you have to look around, that's one of the reasons you always spend more money than you planned. It's a treasure hunt and that makes it an adventure to shop. Plus, regularly they have roadshows where special merchandise is brought in for a limited period of time. Such as a weekend or up to a couple of weeks. It's almost always exciting, interesting merchandise and you need to watch for it because if you miss it you may never be able to get it at that fantastic price again.

Then I ask, "Do you know what the best thing I ever got at Costco was?" Here is where I leave them hanging a little. Sometimes they guess, but nobody ever gets it right. You see the best thing I ever got at Costco was and is, my wife. Then because of that priceless find I got my three children. It doesn't stop there; working at Costco taught me about starting, running and managing a business. Skills, I took with me when I left the company after 10 years as a manager to start my own business. Skills, I used to make a very nice life for me and my family.

I never stopped feeling a sense of pride whenever I saw a Costco, because of the small role I played there during my career.

As our world developed more fully it made sense at a point to go back to work at Costco. I had been gone for over 10 years, equal to how long I had worked there, but an old friend was the warehouse manager of the location nearest and I went back to work at Costco....

I didn't ask for any special consideration, I went through the same process as any new hire and was rehired into an entry-level hourly position. I believe now that this was fortuitous and because of that, many of the things I saw and experienced would not normally have been seen had I started as a supervisor or manager. I saw major changes in the operation of the warehouse since I had been there before. Some fantastic, really dramatic improvements in the business. I also saw things that were not so great. Systemic, cultural changes in the way the business operates. Changes that are not sustainable.

So let me be clear, I love Costco. My time and experience there has in one way or another led to many of the great and wonderful things in my life. I want my kids to be able to go to work at Costco if they choose to, and receive the good pay, benefits and education that I received there. I'm worried; really concerned that upper management does not see or care what is happening to the company and I want to open their eyes to that. I hope I never see the Death of Costco.

# Chapter 2: Pay to shop?

When I was a young man a new store opened in the city where I lived, Mesa Arizona. It was called Price Club, it was unique in several ways. It was a warehouse in an industrial area and when you walked up the entrance was a commercial garage door 12 feet high. When you walked in it was dark and somewhat dreary. There was merchandise stacked on pallets, in steel racks 20 feet high inside the building. There was a truly massive quantity of stuff. You had to pay to shop there, that was crazy. You actually had to buy a membership just to walk-in and if you didn't have a membership card they wouldn't let you in the door!

I thought to myself that's a bunch of baloney, pay to shop? I didn't worry too much about it. Then friends started talking about Price Club and there were articles in the newspaper about how great the deals were and soon I was compelled to join. I went down with my $25 to buy a membership only to find I wasn't allowed to join because I wasn't a member of a qualifying credit union and didn't own a business. This was infuriating, by design, and it worked. I was more determined than ever to get a membership. I decided the best course of action was to become an employee. Employees get a free membership, but don't get a discount.

It's common practice for retailers to hire extra help during the Thanksgiving and Christmas holidays. At Price Club these temporary employees were called seasonals. It was that time of year and I had some extra time on my hands so I applied for a job. I was interviewed and hired. I was surprised by how much they paid and how often raises came. I started to think, I could make a career at this place. I was also surprised by how clearly I was told that I would not be an employee after the Christmas seasonal period. Because they only retain the best of the best seasonal employees. Usually less than 5% of seasonal employee are offered jobs. I actually started working right after Thanksgiving and there wasn't much time left in the seasonal period to distinguish myself. Of course, this was told to every new hire to motivate and fire them up, it worked with me.

I was early, worked harder, ran faster, stayed longer and I learned all I could. At the end of the seasonal period I was one of four people offered a chance to stay. This however did not mean I had a permanent job. I was still on probation for 90 days and was told that it was very unlikely I would make it past the probationary period because very few people did. Every employee and manager was helpful, willing to teach and give advice. I was given what was considered to be one of the worst jobs in the warehouse. I grabbed it like a mean dog with a bone and during my 90 day probationary period a job was posted to work on the night merchandising crew. This is part of company policy; they post jobs in the warehouse for five days. Anyone can sign up for a posted position and at the time they were awarded based on seniority. To this day it's a mystery to me why nobody else signed up for that job, so I got it.

You would think now that I was set for a permanent position. Instead, it was explained to me that now I was basically on double probation because when you get a posted position there is a 30 day probationary period on that position.

I loved the night crew, interestingly enough we did most of our work at night when the warehouse was closed except for a few employees. We drove forklifts and electric pallet jacks as fast as possible honking the warning horn every few seconds to say, stay outta my way. In those days almost every item was in a box that had to be cut open with a razor knife, marked with the label that had an item number on it and re-stacked on a pallet to be displayed for sale. It was hard work, but massively intense and fun. We all had marking guns that printed the item number on a tag or a label that dispensed out of the gun as fast as you could pull the trigger. The labels came in a role and we called them "bullets". So, on the night crew you wore your marking gun in a holster tied around your waist with a razor knife and several roles of extra bullets. It was not uncommon for the four or five guys on the night crew to cut, item mark, palletize and stock several dozen pallets of merchandise in a shift.

We would work on the receiving dock and stage pallets of merchandise to be driven out to the floor after closing. It was crazy, we would race each other every chance we got. If you had two pallets of like merchandise one guy would each take a pallet and race to see who could go fastest. It was a blast, like a three ring circus. We would actually start our shift while the warehouse was still open for members to shop. When there were surges in business we were the roving help that got called to other departments. Night crew really had some attitude. We had to be able to and did do every job in the warehouse and literally wearing guns tied around our waists we looked like and acted like old West gunslingers. We believed we were the best at everything and we acted like it. We were enormously productive, it was hard work with pressure every night to do a little more and I loved every minute. Truth be told I couldn't wait to get to work, I would've done the job for free, but I needed the money so I took it.

We were focused on productivity, every day, all the time figuring out ways to do more with less. It was the same in all departments. At this time there were fewer than 30 locations in the whole company. Managers knew their peers at other locations. They would come in and say "I was talking with Joe in Tucson and he said blah, blah, and it worked for them so let's try it". We were like mad scientist inventors in the retail world, no idea was to wacky to try as long as it didn't cost money.

Around this time I started writing up ideas to improve our member service and for new revenue streams or items to carry. In those days members had a need for copies of their receipt to take advantage of various rebates and givebacks. So I researched all the costs and suggested we have a pay copy machine available. Also at this time people had distilled water dispensers in their homes. I suggest we have refill stations in the warehouse. I would type up ideas on my day off and give them to my manager with copies to the assistant general manager and general manager. They would always call me in to discuss my ideas and teach me what was right and wrong about them. After doing this a few times the warehouse manager (now an executive VP) holding a copy of one of my memos, asked me "Why do you keep doing this?" I told him I was a smart, creative guy and I felt like I was at home in the warehouse and I wanted to be a supervisor or manager. He said "Keep doing what you're doing and you soon will be, we'll give you a chance when the right opportunity comes up."

About this time another job posting went up for a full-time combination position. Up to now, I had been part time status, 25 hours per week. Which is the way everybody starts, even today. In this position you would spend half of your time in merchandising and half of your time in facilities, the department that maintains the property, with an emphasis on exterior building maintenance. Amazingly, I got the position. Now I'm a full-time employee with benefits and all of four months seniority.

Not long after I started the full-time position, the merchandise manager said we were going to start selling fresh produce and that I was going to be the guy to stock that area. The only thing I knew about fresh produce was, I had a rotten peach in my refrigerator at home. That seemed to be nearly equal to the collective knowledge of everybody in the building. Keep in mind at that time we didn't sell fresh anything and we didn't know how to do it. The big challenge is that produce goes bad very quickly in an unrefrigerated warehouse in Arizona. A lesson we learned with our very first pallet of strawberries.

We threw away about as much rotten produce as we sold. Which, quite frankly pissed me off, but our packaging was wrong, quantities were wrong, our displays were wrong, but our learning curve was fast and intense. We were in touch daily with buyers through notes and faxes. What I loved was that the merchandise manager and the foods manager talked with me daily and when I tried stuff that didn't work there was no reprimand, just the suggestion that we not do that again.

At this time most of the guys just wore t-shirts to work, like concert or athletic shirts. The warehouse employee club would have shirts printed and sell them to raise money for the club. I started wearing the shirts all the time that said stuff on them about the warehouse. I thought it was pretty cool because it was so hard to get a job at Price Club.

Also at this time I received the award, merchandiser of the month which got me a special T-shirt of which there were not many around. Once a year we held a contest that we called the stocker Olympics. Anyone could compete head-to-head with pallets of like merchandise. I felt like I was training every day for a sports competition just by doing my job. Most stockers did compete and shared ideas about how to get more productive and just faster. I got second place in the stocker Olympics losing only because I nicked my thumb with the razor knife and the blood made my marking gun jam. Otherwise I would've had the most elite T-shirt in the building. It's more than two decades since then and I still want that shirt!

# Chapter 3: Tires are round and black, right?

I had been full-time two months when one day I was working outside the building when the assistant warehouse manager came out and asked me if I would be willing to work in the tire center? I said "sure" and he said "okay starting next week you're the tire center supervisor." Wham! Just like that I'm a supervisor. Because of the policy that supervisors make more money than the highest-paid hourly person they supervise my pay would more than double. I had barely 6 months with the company and oh yeah, I knew nothing about tires, plus... The current tire center manager was leaving and a new manager would be coming in at the same time as me. I sensed opportunity (this is where I smile) as I wrote before, at this time everybody knew everybody in the company. I asked around, there was agreement that the best tire center manager was at the Northwest Tucson location. I called him and he agreed to help me. On my day off I drove to Tucson and got a one-day crash course in auto center supervision. Yes, that's right auto center, because at that time in Arizona we did all forms of tire service, oil changes and air-conditioning service. This is a big thing in Arizona, because if your car air-conditioning goes out during summer you can resemble a rotisserie chicken in about half an hour.

There was a big issue with Auto Centers and that was that they didn't make any money. In fact they lost considerable money. The philosophy was that we weren't going to raise prices on our services and we weren't going to close the tire centers because it was a service that members expected. Plus, it would kill tire sales on which we did make money. So the decision had been made we would offer more services, hence, auto center.

Now at the time auto center manager was the only manager other than the warehouse manager that had a profit and loss statement. Every other manager in the building was a component of the warehouse profit and loss statement. This was a huge advantage to me because I learned all aspects of the profit and loss statement, forecasting, planning, trending and justification. Most managers didn't get this education until they were an assistant warehouse manager and I was getting it as a supervisor. The problem was of course there was so much red ink on our P&L that it looked like it was bleeding.

The new manager and I both were a little overwhelmed for a couple of months; we had to train ourselves on all of the equipment. We signed off on each other's certifications. We ordered all of our own inventory, five kinds of oil, 45 types of oil filters, various supplies, all of the air-conditioning supplies plus all of the tire supplies, We were in near daily contact with the buyers regarding our tire inventory. We were in a very affluent area (North Scottsdale) and we regularly had the most expensive/rarest of cars in the auto center which required special consideration. We hadn't made much headway on becoming profitable although we believed we could and would eventually.

Just when I was starting to get my feet under me, my manager was promoted to another position inside the building and I was promoted to auto center manager. I had been auto center supervisor four months and with the company less than a year.

As you may have figured out by now, at this time the company was growing crazy fast. One of the things we were taught at the time, was that in order to be promoted you needed to have groomed someone to take your place. Fortunately it was believed that I was ready to take over and I had someone ready to step into my position. If this philosophy is followed by all managers at all locations across the company, at any given time you have staff in place to double the size of the company.

I was though, still pretty fresh off the farm and not very polished with some of my management techniques. About two weeks after becoming the manager of 12 guys working in the Auto Center, the warehouse general manager came out to see me one day.

He asked me "Scott what's your most valuable resource in the auto center?"

"I'm not sure what you're getting at" I replied

"I know you're doing your best. But you're not being sensitive to the guys. A couple of them complained you're being too hard. This is a tough job and they can transfer to a different job."

"Got it" I said.

I went to the phone and ordered six pizzas. When they arrived I stopped everybody for lunch, of course they started thanking me for the food and I said "Listen guys I know I'm a dick sometimes and I'm new in this job so stick with me for a while and I promise a big change for the better."

By now, I knew all the auto center managers in our region and the regional auto center manager. We talked on the phone regularly to brag about how great our shops were doing. One Saturday I called the Tempe location and the manager said he had six guys working. Three had a stomach bug and were vomiting in trash cans but refused to go home because they thought they were going to break a sales record for the day. That is pride. Over the course of a few conversations we all touched base and talked about the same problem. Profits, or more specifically the lack of profits. We all had pretty much the same problem and all had different ideas about how to fix it.

I decided on a plan for my location.

My auto center had seven service bays. Usually we had three or four cars in having the tires changed. Two cars having the oil changed and one car in for air-conditioning service. We had plenty of staff but we weren't organized one guy would change tires then go do a couple of oil changes, then work the desk for a while then go on break etc. etc.

I knew what I wanted to accomplish but I wanted everybody on board. I had learned a valuable lesson from pizza day. We involved the whole crew in goal setting for the auto center. This was no small thing, I believed then and now everybody on the team needs to know where we're going and how we're going to get there. Then we decided to make teams of two guys and measure how many cars per hour a team could process. It seems so simple now but it took a while to work out the details. As everybody got involved a funny thing happened, competitive spirit started coming out. As teams started racing each other there was real improvement in productivity. As one team figured out a faster way to do something there was no way to hide it and in about 30 minutes everybody saw what they were doing, advantages were very short-lived.

It was fun, we were working hard and it was hot, over 100° every day. We would wear black T-shirts under our uniforms and when we would walk in the building after the end of our shift the white sweat stains that crossed our shirts like thick cobwebs announced to everybody the hard work we had been doing all day. One time some of the cashiers complained about how hot it was inside the warehouse. The warehouse manager said "How about I have you go to work in the auto center for a week." No more complaints.

I may have set up a few competitive situations myself that got some people's blood pumping. Simple productivity contests with small rewards, a hotdog lunch, a roll of lifesavers. The sort of stuff that gets people going. Then we started to notice that there were more members than normal in the lobby watching cars get worked on. Usually, they would drop off their car and then go shopping in the warehouse. Now, they were hanging out and watching. So I started asking members why they were staying, it was for the entertainment!

I remember one man in particular said it was like going to the show watching us work. We always had loud rock music on in the shop and cars were coming and going, horns honking in and out, guys racing around like NASCAR pit crews.... He told me that he would pay money just to watch us work.

Another interesting thing happened at this time. We started to draw members' attention to the various services we offered. Most members didn't read the signs and didn't know we had road hazard warranties, or that we would balance and rotate their tires etc. So, we started just very simply asking members if they would like a related service. This is not rocket science, its suggestive selling. Like getting their tires rotated when they got their oil changed or getting an oil change when they got there tires changed. In this way we increased our average service ticket over 40% and with the increase in productivity through teamwork we were able to handle the extra business without using any extra payroll hours and just like that the auto center became profitable.

Now, it's time to really start driving the business (get it? Driving the auto center.) We started seeking and getting fleet business. We made a very simple one third page flyer to give to members when they walked in the front door of the warehouse. It read, get your oil changed while you shop in the auto center and listed the price. ($11.99) I had informally surveyed members and knew the majority didn't know we offer that service. Our oil change business started increasing _10% per week_. We started calling on the phone, members who were business owners. Focusing on businesses we thought might have fleet vehicles. We made them aware of the services we offered. We promised no discounts, our prices were already the lowest in the market, just convenient fast service. The tire business started growing almost 10% per month.

When I started as the tire center supervisor the service suggestion box regularly had written complaints. Now we rarely had anything but pure complements. We had improved profitability and member service at the same time.

During this period I had ideas to expand the auto center business; wash by hand car wash, windshield repair, battery installation, which we did start doing and a couple of other ideas that in retrospect were pretty bad, but we made great progress and it was all very exciting. We actually did sell fresh cut Christmas trees right out in front of the auto center one year. Our members went crazy for the tremendous quality and value and we received great exposure for the auto center.

Also, I had an auto center supervisor who I had taught to be a manager and he, in turn had taught two guys his responsibilities. So when the opportunity came for me to move on we were ready.

# Chapter 4: Does it get cold in Colorado?

"Price club is going to open two locations in Colorado, in Pace's backyard. You should move to Colorado and open a new location. It will really help your career." My warehouse manager in Arizona said.

Pace was a membership warehouse club and their corporate headquarters was in the Denver area. Price Club was going to open two locations on the same day. One in Aurora and one in Westminster. It's a big job to open a brand-new building in a brand-new market just down the road from a major competitor. Very exciting, besides opening the auto center, I was involved in staffing and hiring not just for my department but the whole warehouse. We had a buying office adjacent to the warehouse, we got to know the buyers and they knew us. My relationship with them would soon result in a course of action that would change the face of Price Club and arguably Costco and mean billions of dollars in sales.

When I moved to my small apartment in Aurora, Colorado next door to the warehouse that was under construction, it was a big change. The summer I left Arizona they had closed the airport twice because the temperature was above 122 degrees. I had never seen it snow and I had never really been cold but that would change very soon.

Living in the apartment next door to me was a young woman who was a buyer for the May company. Good people were and are still, hard to find. I was impressed with her, professionally. We needed to hire hundreds of people so we hired her. When she started she said that she had three co-workers from her old company that we should hire also. We did. One of them was a super cute young lady who was very high energy and raced around like the cartoon Tasmanian devil. Did I mention she was very pretty? It took a few months for me to get her to stop long enough to ask her out. More than 20 years and 3 kids later we are still happily married.

On the day of our grand opening we did a little over 100 tires and a dozen oil changes which was a pretty average day at the old location and we handled it no problem because some of my old crew from Scottsdale had flown in to help. Really the only thing unusual besides all the company big shots walking around was that it snowed. That was an interesting day for me and the guys from Arizona. The people from around town kept saying it was no big deal because it still wasn't cold.

Soon though it did get cold. 10 days and the temperature did not get above zero, the pipes froze in my little apartment. It was nice to work in the cold all day and go home and take a bracing sponge bath in the kitchen sink. Also at this time we sold fresh cut Christmas trees in the parking lot. We did a brisk business (get it, brisk?) More business than expected and soon it was clear we were going to run out of Christmas trees. I walked across the parking lot to the buyer's office and begged for more Christmas trees. They got a truck diverted and said it would arrive the day after tomorrow. I had lots of members that wanted trees but we were out. So we started selling trees we didn't have, just giving a receipt and a promise that the truck would arrive, we sold out the whole truck (660 trees) before it arrived and had the same problem all over again. Of course, we blew away forecasted sales. I received a warning about selling merchandise we didn't have. I also received a pat on the back for selling merchandise we didn't have.

The auto center manager at the location across town was really mad I had gotten the extra trucks and madder still that he hadn't thought of it. Ha-ha, take that Mike.

# Chapter 5: Fortune Favors the Bold.

Did I mention it was cold? I was tired of being outside much of the time. Our Auto Center was relatively low volume. In order to keep busy we often worked as the cart crew, bringing shopping carts into the building from the parking lot. It's hard to keep the shop warm with the big doors opening and closing all the time. I told the warehouse manager I wanted to work inside the building as soon as reasonably possible. We had a guy I had taught and that was ready to run the auto center. So I was tasked with an unnamed position inside the warehouse. The warehouse manager said "we'll call you special projects manager and your job is to develop new income streams and cover for other department managers."

At this time warehouse managers had the flexibility to do that sort of thing to push sales.

This was great because when a manager anywhere in the building went on vacation or was out for any reason I filled in, I was the duty manager 20 to 25 hours a week, I learned every area of the building.

I ran the outdoor garden center in the spring. It was very profitable, so much so that I started thinking about, if I personally ran a garden center and a Christmas tree lot I could make a reasonably good living just with those two businesses operating about two months a year. I ran the warehouse physical inventory, a very interesting job, where we count every single item of merchandise in the building in one night. It requires a lot of preparation to go smoothly and you have to be on top of your game. It's also an area that has massively improved in the decade that I was gone and today physical inventory is done much more efficiently even than when I was a manager.

It had been bothering me for almost 2 years at this point that we had not been able to successfully/profitably sell fresh produce. This was my opportunity to make it work. I had a great relationship with the local buyers John and Maria plus the merchandise manager in the warehouse. Everybody wanted to make it happen. We visited and interviewed local vendors, we learned about every aspect of the produce business. I went to grocery stores and talked to the guys stocking the produce, we really dug in.

Think about how the produce section looks at the grocery store, a dozen bags of carrots, a dozen heads of lettuce, peaches and oranges hand stacked, that, wasn't going to work for us, we pallet drive merchandise. A pallet of peaches will go bad in a day or two, then in another day or two peaches are out of season and its plums. The availability, quantity and quality of produce changed daily, you had to get daily shipments and that required daily ordering and that required daily item by item review of sales. At this time (early 90's) you could not track sales until after the warehouse closed and sales from all the registers downloaded to the mainframe and were processed. Then you had to wait for the register system to come back up and had to hand enter each produce item by number to get sales for the previous day. Then I would literally handwrite the next days produce order on a piece of paper and fax it to the buyer and the vendor. This was typically done 9:30 to 10:00 PM and the order would be delivered around 5:00am the next day.

It sounds ridiculous now, but we were a pure warehouse, we didn't sell milk, we didn't sell anything that didn't have a shelf life of at least several weeks. There was serious discussion about whether we should be in the fresh produce business at all. But, the buyers and I believed it would work and little by little we heard from members how much they liked our produce prices and quality (we crushed supermarkets) and faster than that, sales increased. Perhaps most importantly we learned how to run a produce business. It got to the point I could tell you within a few units how much of each item would sell the next day and we all began to be able to forecast sales and keep throwaways minimal. By the way, they should be less than 2% of total sales.

A few months later I was running another physical inventory and on the day of the inventory my warehouse manager said he would need to speak to all of the employees for a few minutes before we started the inventory counting. This made me nervous because he could talk, and with more than 100 employees on the clock I could see the labor dollars really flying... He said don't worry about it and to put on some deodorant and a clean shirt (funny guy). About the time the warehouse closed for business the buyers I had worked closely with for the last several months came walking in and so did Robert Price president of the company. Okay, this wasn't going to be an ordinary inventory.

Mr. Price gave John, Maria and me the Presidents award for our hard work and development of the fresh produce business which he said was now being tried in several other locations. Later, privately, Robert told me he believed fresh produce would be very big and lead to even bigger things now that we had learned it could be done.

A few years later Sol Price, founder of the company was being interviewed for the Connection magazine when he was asked, considering how far the company had come and all the changes that had occurred what was most surprising thing? He said he never would have believed we could do fresh produce profitably, yet that year we would sell $900 million in fresh produce.

In our location I went on to oversee the construction, staffing and start up of the fresh meat department, deli and bakery department's each had its own challenges and each quickly became profitable. I also managed each of the floor sections of the warehouse. This is the warehouse proper, what most members think of when they think about shopping at Costco.

When you walk into the warehouse to shop there is always pallets of merchandise lined up along the fence. This is the impulse area, it's prime real estate. Then as you look further into the building you can see it roughly divided into three sections. The first and closest to you is hardlines. Here we sell, housewares, hardware, large appliances, small appliances, sporting goods etc.

Then the next section is the center. Books, media, clothes, soft goods and seasonal merchandise.

Then the far, third section is foods. It is named that because that is where the food is merchandised.

At various times I was the manager of each of these areas as well as the other business manager in charge of all the ancillary non-warehouse business. Each of these areas has its own manager.

I had a pretty simple system to run these areas. It's necessary because I'm a simple guy. I would start the day by walking my area, systematically, item by item. It would take about an hour. I carried a yellow legal pad and wrote notes on it then wrote the person's name who I want to take care of the note in the margin next to the note. Then I copy the page and give a copy to each person listed in the margin. That way I have written communication with each and every employee I work with every day.

Then, they returned to me at the end of their shift the same page with their notes. Anything not completed goes on the next days list or the list for night crew. This system is the beginning of employee development. This is where you start teaching how you layout an aisle, how you select endcaps, and promotional pods. You start to see how they think and you are able to teach and encourage. Ultimately each person is responsible for their own development but gentle push in the right direction can have major effects at this time. When I was on night crew, my manager was a huge positive influence and I'm thrilled to say that when I came back to Costco two people who were hourly stockers working with me are now warehouse managers.

The mechanics of each area is basically the same. Most of the physical work is done in the morning before the warehouse opens. After the warehouse opens is when the planning and evaluation gets done. If I am going to sell out of bikes tomorrow or the next day I need to plan what we are going to do with the open space. I'm always looking ahead to see what's going to happen. As I write this, the Super Bowl is coming up. Members will have parties, they will need party food maybe a new TV or sofa. So I plan for that sort of thing. As I'm walking the floor members are always asking where's this, do you carry that, etc. if you listen to the members they will tell you what they want. I think that for every member that asks me for something 10 to 15 are looking for it and not asking. So I make notes about what people want as well as what's not selling at a volume to justify the space on the floor. I send those notes to the buyers weekly.

I also include in my notes any items I will want to promote in the next few weeks so they can bring them in for me. For example, I want big bags of popped popcorn for the Super Bowl. Also, I want to be in charge of the merchandise in the impulse area. There is no better place in the building to drive sales, if you use your head. To this day it makes me nuts if I go into any store on the day of the first snow and they still have summer stuff on impulse and not snow shovels, icemelt etc.

When I was auto center manager, one day I was talking to my boss and told him even though I had been a stocker for a few months I didn't feel like I understood merchandising and was afraid of the time I would get moved to a management position in merchandising.

He said "Relax, merchandising is easy. What you do is either right or it's wrong".

"Great" I said "that's really helpful".

He laughed and said "If you follow the six rights, that will be your basis. Then sales will tell you everything else you need to know. Always, always be driving sales."

Just a note here; the six rights are the method used to evaluate how merchandise is merchandised. A book could be written on this subject alone. But they are; the right item/merchandise, in the right place, at the right price, at the right time, of the right quality and in the right condition.

During this time is when Costco bought out Price club. It was, I thought a surprisingly smooth and easy transition. I met and spoke with several of Costco's big guys including Jim Sinegal and they all seem to be decent and honorable people.

I had begun to feel the itch to start my own business but also felt great affection and loyalty for the company that I now had 10 years with. One day I was talking with an executive vice president and asked him directly what was going to happen with us former Price Club people. He told me he believed we would all be treated fairly, but when push came to shove Price Club people would be in second place. Perhaps we both believed in human nature a little too much because that's not the way it worked. All my peers at the time (that stayed) moved on to great careers and have been treated fairly.

You're going to laugh but I wanted to start a business that was simple. That I knew I could handle, but would be scalable. So I would be able to get as big as I wanted. I also wanted something seasonal that would have built-in down time, that would allow me to work on other projects. I'm a simple, but creative guy and wanted time to be able to work on those other projects.

I decided to start a lawn care business. You know, like what you did when you were 12 years old. But here's the thing, I had seen and met people who made $70-100 per man hour in lawn care. And of course I thought I could do better.

A big thing in Colorado is that the soil in many places is a very dense clay. It generally doesn't support nice grass or lawn growth. Then there is a fungus that will grow in the oxygen free environment of the soil that adds additional problems to growing a nice lawn.

The solution is a process called aeration. It's done with the machine the size of a big lawn mower called an aerator.

Aerators drive across your lawn punching holes about 3 inches deep and a half inch in diameter into the soil. That allows air and water to reach down to the roots and the soil around the hole to loosen. The details of the process are not as important as the fact that almost everybody that has a lawn in Colorado needs to have it aerated at least once a year.

A standard aerator can process about 12,000 square feet per hour. An average lawn is approximately 3000 square feet. Most guys charge $35 for a lawn. So if they can do two lawns per hour it's $70 per man hour.

Here's where most guys screw up. They put an ad in the paper or sign on a street corner and people call from large geographic areas. Then when they go do a lawn at this location and then need to drive 10 minutes to the next one then 20 minutes to the next one and so on. The result is that an average guy does one and a half to two lawns per hour. Plus, what I haven't told you is most companies also for $15-20 will also fertilize your lawn at the same time. About half of the people will purchase the fertilizer taking your gross dollars up to close to $100 per man hour.

Can you see the opportunity?

What we did was make a flyer with a great price for one day only. Then hired some kids who would distribute the flyers in a specific, targeted area one week in advance. 50% of the homeowners in the target area would respond. We could do dozens of lawns with no travel time in between jobs making us crazy productive.

Guys who do lawn work for a living generally receive a pretty low wage. We paid a very high wage for this type of work and paid a daily bonus for the most productive guy.

The last season we did this program, we processed a little more than 10,000 lawns. The aeration season is eight weeks.

There is a limit to how long I can be engaged, punching holes in the dirt. So I sold the lawn care business. Equipment to a couple of guys and the accounts to another. Lock, stock and barrel it was gone.

I have a friend who built his own house. Taught himself how to do it by reading books. Kind of amazing isn't it? Then, he built another and another etc.

He knew I was sitting around twiddling my thumbs wondering what to do next and said "Why don't you help me and I will teach you how to pound nails into boards".

A couple of years later we built 14 houses in one year. He was a genius at figuring out how to do things faster and better. As he reads this he will think "What the hell is he talking about?" And he'll think that because it's so much a part of his DNA to think like that, that he believes it's normal.

An example, one time we were putting the roof on a small house. Normal construction guys would've estimated that it would take 16 to 20 man hours to do the job. If they even thought about it. John had a few great ideas and we put the roof up in 90 minutes with three guys, 4.5 man hours.

He and I invented several products together. Some were patented, one was infringed on and that one worked its way through the federal court system for six years before being resolved. (You have Google, right?)

We were pretty smart guys for the most part and saw the bursting real estate bubble before it happened. We thought we had sufficiently hedged ourselves. But we were wrong. We survived longer and in better shape than almost everybody else that was involved in real estate at the time. But we still got bumped and bruised pretty bad.

So, once again I'm sitting around wondering what to do with myself.

All of this experience was a great adventure but I didn't know what to do next. Meanwhile, Costco opened a second location in Colorado Springs Colorado. A few friends of mine from my days with the company were there and I thought it would be fun to go back, at least for a year or two, if things worked out maybe stay to the time I was ready to retire or until I decided on a different path.

A couple of people offered to get me back in, but I wanted the full experience just like any other new employee. I did my own online application, interviewed twice, drug test, (I passed) and got hired. I was honest about my past experience as a manager, but asked for nothing special. I didn't even ask to be brought in at a higher pay level. Just give me a chance and let the chips fall where they may.

To tell the truth I was somewhat unsure about being in management again and I thought it might be better just to start slow, get the lay of the land so to speak. Plus I was sure things had changed from an operations point of view and starting at the bottom would be a good way to see these changes.

The first obvious change was the online application. They can do all kinds things with that newfangled Internet. I then got a telephone call and was invited in for an interview. When I came in for that first interview a front end supervisor gave me a clipboard that had a printed copy of my online application to be reviewed and signed. Also on the clipboard were documents that amounted to a standardized interview outline. It was easy to figure out I was not supposed to see this document as it was a list of interview questions to be asked. I returned it to the supervisor and we agreed that if she wouldn't tell, I wouldn't tell.

The first interview was very structured, prelisted questions, cookie-cutter in nature. This was my first glimpse into the legalistic policy that now governs much of the operations side of the business. It's hard to get hired, a lot of people get turned down and Costco wants to be able to say all interviews are conducted in the same manner and format. That way they can show its equal for everybody. My second interview was much the same but with a senior manager. When I told him I was a former employee, that had not been fired and as far as I knew, eligible for rehire I was basically rubberstamped and proceeded to the next step which was orientation. One thing that was interesting in the second interview was that I was asked a question about avoiding/resolving conflict in the workplace. I stated that my experience has been that clear and complete communication usually avoided or mitigated most issues. He enthusiastically agreed with that and said that his experience had been much the same. I would remind him of this conversation, somewhat to his frustration several times in the future.

# Chapter 6: New Beginnings

On my first day of orientation the HR manager told me he was able to get my old employee number again. Wow, that's great, I didn't even know we had employee numbers. 226995. But when you think about it kind of makes sense you don't want to get all of the Scott Pivonka's mixed up.

I was asked what department I would like to work in, several were available I said anywhere is fine. That's how I became the chicken man. Costco now has a program where new hires are assigned a "Buddy." This person is a more experienced employee to help you around and show you the ropes. In theory it's a great program but my buddy was the department manager and she didn't have time to be showing me around.

All of the new hires I went through orientation with were assigned buddies who were department managers. I think this kind of violates the spirit of the policy. It's intended to give a new employee a non-intimidating safe harbor until they get comfortable. By assigning a manager you save a few payroll dollars but defeat the purpose of the program.

Very soon on almost any day you could find me in the rotisserie cooking chickens. 200-400 a day 2000 a week, I smelled like chicken, my car smelled like chicken, I dreamed of chickens and my dog would meet me when I got home slobbering all over the place. A member once said to me, I'll bet you cook more chickens before lunch than most people cook in a lifetime and I think she was right, but I really enjoyed it.

When you work in the rotisserie where the chickens are cooked it's financially linked to the service deli. Believe it or not cooking chickens is not all that you are responsible to do. Adjacent to the rotisserie is a small room called the raw room where you skewer the raw chicken in preparation to be loaded in the ovens. Also in this room you prepare any dish sold through the deli that has raw meat of any type. On most days the person that opens the rotisserie also prepares 20-60 pounds of seasoned tri-tip roasts, 40-100 pounds of seasoned pork ribs, 15-30 pounds Salmon Milano (if you're getting hungry all of these dishes are delicious) then you cook chicken wings and around the holidays and special events there are many seasonal dishes, seasoned turkey, stuffed prime rib etc. then when that's all done if you have spare time which you should, you jump over to the deli and help prep the 30 to 40 items made their daily.

It takes 90-120 minutes to cook an oven of chickens. A full oven cooks 32 at a time. Most locations have 2-4 ovens. Costco cooks millions of chickens every year.

If a person in the rotisserie keeps busy they produced goods, that when sold will generate $300-$400 per hour. This is one of the ways productivity is measured, dollars/man hour.

A simple example would be, if you cook chickens rotating the ovens so that you have one oven finish cooking every hour and those chickens sell, no more no less, 32 chickens at $4.99 each would be $159.68 for one hours work and sales.

This is part of the puzzle, every department measures productivity in dollars divided by man hours. Some departments don't sell anything. Such as the guys that pull the carts in from the parking lot, cashiers, front end assistants, dock workers etc. in fact most of the employees that work in warehouse operations measure their productivity against total or gross warehouse sales.

An example, 100 full-time employees would work 4000 hours in one week.

If in that same week the warehouse had $1 million in total sales, you would divide $1 million by 4000 and your total warehouse productivity would be $250 per man hour.

Back to the deli/rotisserie you could work like crazy all day cooking chickens and making mac & cheese. A point comes when you have made enough for the day. Then it's time to clean up and harvest out of code product. Everything and I mean everything has to be washed, rinsed and sanitized. Preparations for the next day are done and there is considerable pressure to do this fast, because nothing is being produced for sale during this time.

My first day as an employee was exciting to me. To get back in the busy, intense environment that is retail. I know it's not national security but I was happy about the opportunity and believed that I would be able to guide my own path and this was the first step.

I was somewhat surprised to learn on that first day that I was to be taught the job I did by the newest employee of the department. Not my buddy who was the department manager and who I thought would be teaching me. At first blush this makes sense, he was the guy doing the job on a daily basis. He should be the one to teach me right? Well, the poor guy who I liked very much and was a super hard worker had absolutely no idea how to teach. On the first day we were late getting done, doing the job with two people doing what one person normally does.

Wow, I thought, he is not going to say "I'm a bad trainer" he's going to say "This guy stinks and was dragging me down all day". The next day I structured my own training. I had a list, which I shared with my trainer that was basically a step by step, how do we do this, that, when, why, how, etc. I made my own schedule of progress and that day we got done 45 minutes early and I knew, I would be able to handle the job. It seems logical to have a person who does the job train the job, but whenever possible I want to teach new people myself. Short of that at least check in a couple of times per shift and make sure the person doing the training has the tools and know-how to train another person to do that job.

75% of the employees that were hired and went through orientation with me did not make it to the end of probation. I think there's opportunity here that we will discuss more later.

Over the next few days I was cross trained in the deli so I could lend a hand as necessary. Because I have been running enterprises, businesses and various projects for years I was curious about stuff the average new employee probably wouldn't be, so I would ask my buddy/manager all kinds of questions, but she was not very forthcoming with information. This was understandable; because she knew I was a former manager and was unsure of how to deal with me. (I might have been some sort of spy) our relationship tended to be somewhat strange and I don't think she was ever entirely comfortable having me in the department.

However, I did find out pretty quickly that the department was barely making a profit and, it seemed nobody really cared. This bothered me enormously, but let's not forget, I was the new guy and it was clear my manager was not concerned. So, I chose to keep my powder dry and see what happened.

I started to see old friends from time to time. Managers often have occasion to visit warehouses other than the one where they work. Inside of a few weeks I reconnected with several old coworkers. Of course most were happy to see me because I'm a charming, fun guy. The inevitable reminiscing would start, remember so and so, remember when, this, that, etc. One old friend even happen to have a photo of us together working at the Westminster, Colorado location 20 years before. Ultimately these conversations would run their course and end with something like, "Well, things are different now." Two current warehouse managers who I used to work with, in their own way said that if I still had the same hard charging style I might not be as welcome as before.

I had an illuminating experience about a week after I started. I was closing the service deli by myself and a member knocked on the door asking if we could special order a certain variety of sausage from a vendor that we already carry products from. I told her I was sure we would be able to and the amount that she wanted would have been about $150 per week in additional sales. I took her information and passed it on to the foods manager. The next day the merchandise manager came to me and said "We don't do that sort of thing."

When you are hired there is a probationary period, 90 days during that time you can be let go, fired or allowed to seek your fortune elsewhere for any reason, or no reason at all. To be fair hiring new people is tough, for all the interviewing and evaluation, good people are hard to find. My experience during both of my stints with Costco was that they think they try really hard to make employees successful in their career. One of the things they do is give you a performance evaluations regularly during your probationary period.

When I got my 30 day review I was not surprised that there was very little constructive about my performance in it. My manager/buddy and I had not worked together more than a few minutes at a time for the full month I had been there. What was offered was the usual mundane, good attitude, on time, work smarter not harder, faster more efficient etc. etc. When I asked how she arrived at these conclusions, she admitted that she had solicited feedback from coworkers and much of it was standard content for employees who are doing okay. I asked how she knew an employee needed to be more efficient? What measure was used? Did she compare rotisserie productivity to deli productivity? As expected, no measure was made, only observation and hearsay. But guess what, I had been calculating productivity and had the numbers. I showed her that rotisserie employees were much more productive than deli employees where she spent most of her time. This was a surprise to her and we had a nice conversation about it. However she had said in the written review that I seemed to be a creative person and I should feel free to give her any ideas to possibly improve the department.

I decided to take her up on her invitation.

I have always believed you have to have fun at work. I believe no matter how crappy a job is, there is always a way to extract some fun. If you send me out to dig hole with a shovel in a junkie back lot, I'll have some fun. I will guess or ask you how long it should take to do the job. Then I will race the clock or I will imagine there is buried treasure and the pirates are on the way to get it and I must beat them to it. Believe me, I always find the fun (now you know besides charming, I'm fun)

A couple of things had been bothering me about working in the deli/rotisserie (besides lack of profit) first the equipment in the room was not laid out to be efficient. Second, nobody had fun. It wasn't drudgery but people were not in a hurry to start working, then when they did start the clear goal was just to get the end of the shift. I had a simple plan to solve all of these issues.

If you are looking down from the skies on top of the building the service deli's work area is shaped like the capital letter "L" and the stainless steel tables that we work on are laid out like a capital "U" inside the letter "L". (See figure 1.) This makes it very difficult to walk around the tables, for example taking equipment over to the wash basins. There is a bottleneck getting around the other workers and it tends to promote working as individuals, and that's almost always what happens. Joe, makes salads, Suzanne makes shrimp dishes and Pete makes Chicken Alfredo. Although there are several steps to making even simple dishes, we almost always work as individuals. When I asked about this I was told that this is the way we have always done it. When I suggested we might go faster by kind of working like an assembly line the reply was, why would we do that?

So I wrote the following memo;

To: I'm leaving the names out.  
From: Scott Pivonka  
Date: 05/02/13  
RE: A couple of ideas

During my last review you invited me to share ideas and suggestions about the deli department. Now I'm going to take you up on that offer.

My first thoughts go to improving production efficiency and lowering payroll all while improving the fishbowl effect.

The service deli facility itself is shaped like the letter "L" and we have set up to work tables in the shape of a "U" inside the "L" (see figure 1) this causes difficulty getting around the workstation, especially with a rolling cart or if a person is carrying a box. Also because of the limited space employees tend to work independently rather than in teams.

My suggestion is to set up the work tables in the configuration of an "L" inside the "L" (see figure 2) this would allow more space to get around the workstation and maximize the fishbowl effect, as it would not be necessary for anyone to be working with their back to the windows. It would naturally lead to more assembly-line type preparation which we know to be generally more efficient.

An example would be making the enchilada bake which has several steps in the preparation process. If two or three employees are involved in the process, I believe the batch will be made in less than 1/2 or 1/3 the time it takes one person to make it now. I think with the workspace configured as described employees will naturally begin the process products in this fashion without much encouragement. Should you wish to encourage it though, it could be done in a fun, friendly way, by having races.

For example, today you and I and Adam are in the production room and need a batch of enchilada bake. Suppose we prepared 24 sell units in 24 minutes or one unit per minute. We could have a log in a notebook and list that outcome. Tomorrow Nick, Jamie and Luke make the same batch of 24 sell units in 22 min.(I know it couldn't really happen that those three would beat us but go with me) now, they would have bragging rights and competition to improve productivity has begun. As the schedule changes new teams will be formed and dissolved but the log will reveal the fastest and the desire to be productive will bleed over to production of all entrées. It will have to be made clear that presentation and quality control standards cannot be reduced at all.

Perhaps the winners over the course of a month would get special recognition may be a photo on display or special hats etc.

I understand my place in the department which is the lowest seniority person. If you use any of these ideas or not, I will not say a word to any of my coworkers unless you ask me to. I look forward to your feedback.

Just to note here, when you walk in the warehouse the service deli has glass walls around it so members can watch the fresh meals being prepared daily. This is what is referred to as the fishbowl effect.

Keep in mind the tables are movable and get moved daily in order to clean under them. This is a two-minute change that I believe would result in 8-12% increased production efficiency and more fun. Because it's always more fun to work in a slightly competitive atmosphere than just slogging along getting to the next task.

A word here about labor costs. In retail business the biggest expense is the products you sell, for example when you sell cooked chickens the cost of the raw chicken is the biggest expense you have. The second largest expenses is usually labor, or what you have to pay people to cook the chicken. Remaining costs are infrastructure, administration, benefits etc. if you can reduce labor costs it has a major impact on profit.

Costco pays a fantastic wage and in exchange expects you to be something special, almost all of the employees are, but over time even the best of us takes a break, starts to coast a little and subconsciously our standard starts to relax. You, I, we have to be on guard against this and bump up our standards sometimes just to remind everybody we are special. In the old days they had a guy with a whip or a heavy stick to remind you to raise your standards. Today, that type of motivation is frowned on in the workplace. Saying, "Come on guys we need to pick it up" is okay for a very short time but it only lasts about 15 minutes. So here's the trick, for motivation, set goals for the department, map out a plan on how to get there and invent a fun way to do it. (Review auto Center chapter, Lawn care, etc) If you really try and can't come up with a plan, email me, I'll help you. Then share that plan, at the very least share it with your key people and include your boss. But here's the big thing.... Most managers in the old days shared their department goals with all or most of their peer managers (they help keep you on track) and all of their employees. The employees want something more to work for than just a paycheck. Plus, this is how you begin to identify employees who can handle more responsibility. Remember the auto Center and the daily communication in merchandising?

Now you've read the memo and looked at the drawings, what do you think? Is it worth a test? The response to my idea was.... Neither yes or no, it was in fact, no response. I found it amazing that no one so much as came to me and said Scott you're full of baloney. However, about 10 days later I happened to be closing the service deli one afternoon and the assistant warehouse manager in charge of other businesses was walking around looking in the deli windows. I stuck my head out and asked what he was doing?

He said "I'm looking at your proposed layout and frankly I'm wondering why nobody ever saw this before."

To which of course I said "Great! It might not work as well as I think but there's only one way to find out so with your support let's try it tomorrow for a few days and see what happens."

"Whoa whoa" he says, "I think I need to check with the regional manager and on a couple of things so just hold on and we'll see." Well I had a hard time seeing any downside. It would take less than 2 minutes to make the change and the results would be clear soon.

I said "Really? You can't just pull the trigger and try this?" He went on to explain that we would be getting a new department manager soon and he did not want to go making any changes without talking to the new manager and letting that person gets settled in. So, I waited, and waited, and never heard another word about it.

The person who does the facility maintenance is actually a very skilled person and is typically overwhelmed with a long list of things that need to be done around the warehouse. The building I was working in was no exception. Because I had prior experience in that department they asked me if I would like to pick up an extra 10 to 12 hours a week. I have mad skill at snaking drains and changing light bulbs so I was happy to lend a hand and get paid for it. Here's a quick note to all warehouse managers. When you pull your skilled maintenance person to work on the front end or clean the bathrooms the annual maintenance on your HVAC system and a lot of other stuff is not getting done. Remember that, once equipment starts breaking down around the building. This job really gave me a chance to meet and work with people and managers in all departments around the warehouse. Another hot tip. If you are wondering what's going on, ask your facility guy he hears all the gossip. It's surprising what people say when you're repairing stuff in their department. It was great example of using existing resources by using me.

Soon thereafter it was announced that the deli manager was moving to a different department and the job of deli manager was going to be posted.

This process took a surprising amount of time (about six weeks) during which we were shorthanded and former deli managers were asked to write the schedule and check in with us occasionally. Because no one was in charge some things got out of whack. For example Costco has a policy that if you work eight consecutive weeks full-time in the same department your permanent status will be changed to full-time. This happened to two employees in the department during this hiatus with no manager. This reduces scheduling flexibility and increases fixed labor costs. There were also disagreements among the employees regularly in regard to daily priorities. Sometimes heated disagreements, morale suffered, feelings were hurt and these issues like scars lasted long past the time when the new manager took over.

I was still somewhat unsure about moving into management because it is definitely a step in commitment. I was still part-time and enjoying taking the kids to school, picking them up, going to games etc. but it was frustrating to see how management was satisfied with the profitability of the deli/rotisserie.

Frustrating, truly that is an understatement, now having worked in and around several departments as the facility grunt, I was seeing that there was a feeling of good enough, is good enough and that, as most people know it is not good enough. Seriously, status quo should be treated as vulgar. There are literally hundreds of retailers that have gone out of business because they had it all figured out, got satisfied, stopped pushing, and stopped innovating. Plus, that's no fun. So, I decided to sign the posting and put in for the job of service deli manager.

I studied, learned the numbers, policies and the handbook. Plus I wrote a game plan for exactly how I would run the department. I even addressed how management could and should deal with any negative feedback they might get from promoting someone who was actually still on probation to a management position. I had my interview with the warehouse general manager and the assistant general manager for other businesses it went about 45 min. and they both told me they had never had someone come in with a prepared agenda and control an interview like I had. Later, I was told that I by far had the best interview but the choice had been preordained by the corporate offices and they were just going through the motions. I am going to go into more detail about this later. But it is much better to be honest than make people get their hopes up only to be passed over.

By this I mean there were a couple of employees who believed that their time had come for promotion. They had high hopes for this promotion. One in particular was very disappointed and told me in confidence she was giving up and would never put in for another position. It was difficult emotionally. In confidence I told upper management about this situation and suggested some honest communication might be in order. I reminded them of the conversation we had in my interview about how communication avoids conflict. There was agreement, but they said their hands were tied so what's the point. The term "You can't fight city hall" was used. They talked about the legalities of following procedure and the handbook. But they were clearly nervous about her state of mind, would she write a letter? There had been some employees write letters to corporate and that causes a big problems for management in the warehouse. I said I didn't think she was going to write, but a few quality minutes with her might go a long way toward making her feel better.

But, you can't hide this kind of stuff, the games and the politics. The employees always figure it out and then they just get mad. Being honest and open is better for the company and employees both. They will understand if you need to bring in a manager on a transfer, stuff happens. The woman I wrote about just wanted the honest truth about why she was passed over, again. She told me she was willing to do anything to improve her personal skill set but was given no guidance so didn't know what to do. A hard working, long term employee probably deserves to know about how to improve her situation.

The person they brought in from another location to be the manager was deserving, qualified and finally a good manager. She had different priorities and style than I expected but she was good and I worked with her for several months. She had great people skills, which is a phrase that I hate but she really did have the ability to size up a person's personality very quickly and deal them with them in a way that worked for them. Also quietly and very much in her own way she worked on profitability of the deli and improved it over the next few fiscal periods. For this she was quite properly rewarded with a modest increase in salary which was taken away again after two paychecks because the paperwork had not been properly handled and was deemed to be inappropriate at corporate headquarters. More on this later.

# Chapter 7: Do we want to increase sales?

One day I was working an eight hour shift so I had a lunch break. I had left my brown bag on the counter at home. I was disappointed because I had packed in my lunch a chocolate chip cookie from the Costco bakery that I had purchased in the huge Costco package the day before. This is actually pretty serious because, I love my chocolate chip cookies. Lots of members love those cookies, they're so big that they're almost a meal in themselves and when, years ago we first started selling them it was rumored that legal had gotten involved because the individual chocolate chips were so big there was concern that they might be a choking hazard.

So, off I went to the food cart to buy a hotdog, soda pop and a cookie. You know what the problem was, no cookies sold in the food cart. Obviously, this is an opportunity. I happened to see the food cart manager and her boss both in the next couple of hours and pointed out to them the chance to make more money for the food cart.

The response was so totally negative that I was surprised. The excuses were many and the reasons few as to why we couldn't sell cookies in the food cart. But since all of my ideas are great (until they're not!!) I decided to do a little informal groundwork. Guess what, if you buy cookies off the floor (at retail price) in the bakery package you could resell them in the food cart for $.50 each. That's a reasonable margin and price.

But what if nobody bought them?

Over a couple of days I asked everybody I came in contact with, employees, members, friends, my kids' etc. two questions. The first was, do you ever, buy anything at the food cart? If the answer was yes, we proceeded to question two, which was, if fresh-baked chocolate chip cookies were available for $.50 each would you ever buy one? Almost half of the people who answered yes to the first question answered yes to the second question. As you can tell this is a very accurate, scientific analysis that suggested maybe it would be a good idea to give it a try.

If you sold 100 cookies per day for .50 cents it's $50 per day in increased revenue to the food cart. 600 food courts, equals $30,000 per day or $840,000 per four week fiscal period. Plus, the increased sales realized in the bakery from the exposure of selling cookies in the food court.

Now, you get your first lesson in Costco economics. The cookies purchased in the large package from the bakery actually cost 26.65 cents each. Let's call it .27 cents. The normal margin for Costco on the cost of goods sold is 10% that makes the retail price of this cookie .30 cents. Using these numbers the profit drops dramatically right? Wrong. Costco has proven over and over again for years that if you lower the price, people will buy more. So the positive numbers outlined above will actually be larger if you sell the cookies for .30 cents as opposed to .50 cents.

I know, I know, you're thinking... The chicken man is a genius, because altogether that's close to $1 million in increased sales to the company every fiscal period. Right? But, that's small, very small numbers as compared to overall company sales, but you know the old saying, a million here and a million there and pretty soon you're talking about real money.

A few days later, with this new information I went back to the food cart manager and her boss. Long story short, "We are not going to try that or anything else unless it is approved in advance by corporate!"

I'm beginning to sense a trend, but, I'm a little slow sometimes so I was soon onto my next observation...

I often close the deli and/or the chicken room and at this point I would often get done early with my duties. Sometimes the closing manager would ask if I would be willing to help close the warehouse floor. That is clean and level merchandise, collect boxes, put away weeds etc. one of the things that needs to be done is all the clothing needs to be straightened, sorted, refolded and neatly re-merchandised. It's always a mess by the end of the shopping day because we display the clothing flat, on stacked pallets. The members, God bless them, know that whatever size or color they want it's at the bottom of a stack. So they burrow down into the clothes like a groundhog. At the end of the day you have to remove a good portion of the clothes, throw them to the side or in carts and begin folding and replacing them on the stacked pallets. We have a lot of clothes in the warehouse and at any given time that is a lot of refolding and re-stacking. Everyday 10 to 15 employees for about an hour.

I mentioned this to the warehouse manager and he said that the belief was that stacking clothes on pallets rather than hanging them up created a more open, inviting appearance to the warehouse. To which I asked "Isn't this a warehouse? Open and inviting, really?" How much does that pay? 12 employees at an average wage of $20 per hour plus benefits for one hour is $240 times 600 locations is $144,000 per day or $4,032,000 per 28 day fiscal period. That's a lot of money to create an open and inviting appearance for people who have already purchased a membership and are in the building. By the way in case you're wondering the solution is hang the clothes up.

# Chapter 8: Are we adversaries?

Two interesting experiences I had, kind of tied together.

One day I was coming in for an early shift, before the warehouse was open for members to shop. The employees enter into the building through the rear, the receiving dock. Normally, you push a buzzer and someone inside hears the buzzer and pushes a remote to unlock the man size door and let you in to the receiving dock. On this day the big rollup door adjacent to the man door was open. It's not uncommon to open the big door, there are things that need to be moved in and out that are too big to fit through a man door such as forklifts. Exercising what I believed was some common sense I stopped at the edge of the door to see if anything that could squish me was coming out. I didn't see any activity at all so I walked in. That was a mistake. Some distance away was the receiving manager (a senior manager) she yelled for me to go back out again and press the button to enter in the normal manner, which I did. By the time I had done that, she walked over to explain, saying that it was unsafe to walk in through an open rollup door. Then I asked if it's unsafe to walk through an open rollup door, why had she ordered me to do it a second time? I didn't think much about this because there are always policies/rules about stuff and it's a manager's job to point them out (like that silly lift with your legs not your back policy) and I believed this was one of those. But, without pause she went on to tell me that the auditor says, no walking in through an open rollup door and we follow the policies set by the auditors. I asked who and where the auditor was? Because we had auditors in the building when I worked at Costco before. I loved having them around double checking, identifying problems, helping to solve problems etc. In fact a guy who was an auditor played a major role in my wedding. But none of that was the case now, because auditors are based in the corporate offices, visit on their own schedule and as I would soon find out their presence is regarded as unpleasant.

A couple of weeks later I opened the rotisserie one day and right away, excitedly, the guys in the deli said someone had called from the location across town and said the auditors were wrapping up at that location. Everyone assumed they would be headed our way next. This information was conveyed with such intensity that I knew I was missing something so I asked, "Why all the excitement?"

I was told "Because if the auditor catches you doing something wrong you can really get in trouble, they document policy violations, they catch every little thing and put it in their report. Just make sure all of your paperwork is done and you're doing everything by the book so you don't get busted!"

Now I just didn't believe that auditors were the police of Costco and I typically do what I'm supposed to do when I'm supposed to do it so I didn't worry. A few hours later when the auditor showed up as I was rolling a cart of raw chicken to the oven, he stopped and asked me how long it had been since I skewered the chickens. No hi, hello, I am Joe the auditor, etc. just how long since you skewered those chickens? I said about five minutes and he said okay and started to walk away so, I stopped him and said "What would have happened if I had said 30 minutes?"

"Is that how long it's been?" He asked.

I said, "I think you're missing the thrust of my point I'm trying to find out if were on the same side or if we are adversaries?"

He smiled and said "My job is to check if you're following the company policy. If I don't write stuff on my list my boss thinks I'm not doing my job so I guess that kind of makes us adversaries."

Similar attitudes comes up in regard to buyers. I was baffled the first time I answered the phone in the deli and it was a buyer that wanted to speak with the manager. When I told her who was on the phone her response was "Oh shit" which I thought was probably just a reaction to forgetting to return a call for some sort of relatively small situation. But as time went on manager after manager told me you don't want to have to deal with or talk to the buyers, their busy and if they want or need something they'll let us know. "What about if you want to promote an item or have an in stock condition that needs to be addressed?" I asked "We send an email, but we really try not to bother the buyers".

If you remember my relationship with the buyers from earlier you will understand how strange this seemed, and sad.

# Chapter 9: Let's talk about Executive Memberships.

When you join Costco or become a member it costs $55. This is called the Goldstar membership or Business membership. For our purpose here both are essentially the same. It allows you and one other person to shop for one year. It's worth the money. Costco has lots of information available to show how much you saved by shopping there. I'm not going to go into it but if you shop a very little it more than pays for itself.

Your other option is the executive membership. It costs twice as much, $110. For that price, besides getting a much cooler looking membership card you get several benefits, the big one being that at the end of the year Costco pays you a 2% cash back reward. They send you a check in the mail. If you spend $2751 you will receive back more than the additional $55 you spent on the upgraded membership.

This is a great deal for members and a great deal for Costco. Executive members on average spend more money per shopping trip and per year then Goldstar/Business members and they retain their memberships year to year at a significantly higher rate than members who purchase the $55 membership.

The chicken or the egg?

Do executive members spend more because they're executive members, or do members who spend more, buy executive memberships. I don't know, and for the most part I don't care. I want more executive members and so do most warehouse managers they just don't know how to get them and it's not a high priority for them.

In my building, one day I had a late shift so I walked into work through the front door the same way members do. Set up in the impulse area where you first start shopping was a banquet table with executive membership brochures, a bowl of hard candy and my friend Susan standing there. I asked Susan (not her real name) what she was doing?

She said "Trying to convert people to executive memberships"

I said "Wow, that's great how are you doing that?"

"I don't have a clue. I'm getting thrown to the wolves again. They always make me do stuff like this because I don't complain and they can check off their box saying they have somebody on it."

Now, numerous books have been written on putting the right person in the right job and how to make sure a person has the right tools to do a job. But this was the hand that was dealt so I thought let's play....

I asked Susan, who is normally a cashier "Who put you out here?" she told me the front end manager. Now don't forget, I'm the chicken man and my shift starts in about 10 minutes.

So I asked her "What's your biggest problem here?"

She said "I don't know how to get people to pay attention to me or ask questions about what's going on."

I said "Well you are probably going to need to ask them a question or two to get things started. Maybe hold the candy, offer a piece and ask, how would you like to get your membership paid for?" Or "How would you like to get your membership at no cost just by shopping?" I made a couple of other suggestions and we role-played for about two minutes and I went to work. The chickens don't cook themselves. Later that same day she stopped by the rotisserie to tell me my suggestions had really helped and she ended up having fun talking to the members about executive memberships.

Obviously there's an opportunity here.... Later that same day I happened to come across the previously mentioned front end manager along with another manager. I recounted for them the story of Susan and told them if they would let me meet with three or four cashiers at a time for 15 minutes each session after two hours of total teaching we would massively increase executive membership conversions. I also suggested a couple ways to make it competitive and fun! Their answer..... "We don't do that."

Okay, I understand the concern. Let me try to explain. Let's assume the manager lets me hold my splinter meetings and everything progresses as I anticipate.

Next month the regional manager comes for a visit and the conversation goes like this;

Regional manager; "Wow, your executive membership conversions are through the roof, what are you doing?"

Warehouse manager; "We have an employee who has some skills in this area and he's been teaching other employees how to increase conversions."

Regional manager; "Who approved that?"

Warehouse manager; "Well, I thought it would be okay"

Regional manager; "What is he saying, what is he teaching? Has it been run by legal?"

Warehouse manager; "We are not doing anything that hasn't been done before were just doing it on a larger scale."

Regional manager; "Well you're doing something different, nobody's ever had numbers like this before. Are they promising something that's going to come back to bite us?"

This is a conversation no manager wants to have in the current policy driven, legalistic environment.

# Chapter 10: "That could harm my career"

Costco regularly sends out coupon books in the mail to their members. These coupon books represent extraordinary values above and beyond Costco's regular great prices. Almost always the coupon book includes an item from the deli. When the coupon book includes a coupon for pizza it means that we will have to make hundreds of pizzas a day and we typically will need one person making pizzas all day long.

The way pizzas are made in the deli is that the pizza crust, sauce and cheese are shipped frozen and individually shrink-wrapped inside the presentation box and 10 presentation boxes are inside a larger box. Then the larger boxes are stacked on pallets shrink-wrapped and shipped to the warehouse location. When it's time to make the pizza, a deli employee will grab one of the master case boxes, cut it open, flip it upside down dump the 10 pizza boxes on the table, open the top, cut the shrink-wrap off of the pizza and put the appropriate toppings on the pizzas, close the box. put on a label and your done.

One day, I was on temporary duty as the pizza man. After a relatively short period of time I had a large stack of the master case pizza boxes and started wondering why we shipped pizzas in the second box instead of just shrink-wrapping the presentation boxes like many other items in the building. The obvious answer is that the second box is necessary for safe transport/shipping to keep the pizzas from being damaged. But my instinct told me the structural integrity of the inner box would be satisfactory if 10 boxes were shrink-wrapped together. I asked the guys I was working with if they agreed and everybody did. So I decided to do a little bit of math and my rough calculations were that it would save tens of thousands of dollars a fiscal period to eliminate the outer box.

This conversation led to another conversation and everybody in the room expressed that they had ideas about how to make or save money for Costco but everybody in the room believed that management was not receptive to their ideas.

I decided to do a test, that night I wrote the following memo and addressed it to my manager, with copies to the warehouse manager, assistant warehouse managers and two of the warehouse senior managers. I am not including the cover letter for obvious reasons.

Crowdsourcing is the term given to the theory that in any large group is the answer to any question or problem.

For years it has been theorized that if you could tap the mental resource of any large group (like at a sporting event) it would be possible to solve any problem. But it was always difficult to test. People at the football game want to watch the game, not solve your problem.

Today, the World Wide Web has opened various opportunities for crowdsource problem solving. There are several examples of how this technology is used. Basically they can be divided into two groups. Like two sides of the same coin.

First, you or your company has an issue, you're in need of a special chemical or special shipping container as examples. The problem is described, with the required parameters and submitted to the crowd, sometimes with a reward offered. Then the crowd goes to work on its own schedule. Part of the advantage of being on the Internet is that people or members of the crowd can review and work on the problems on their own schedule.

The other side of the coin is that members of the crowd have solutions. But don't necessarily know where the problem is, or don't know how to get the solution to the right person to act on. Say you have an idea for a widget that bounces at temperatures under 60°. It's a great technology you just don't know what to do with it. Submitted to the crowd, somebody will understand the application.

There is a third side to the coin that is a combination of both the previous. Several municipalities have set up websites and dedicated phone numbers for citizens to contact the municipality regarding suggestions or concerns. For example, cities have found that they can eliminate the crews that search for potholes because the crowd will report them. Also, the crowd makes suggestions to improve services (like more efficient garbage route pickup) making them much more targeted to the customer/citizen.

How does this apply to Costco?

We know because of our hiring and development practices that Costco employees are among the most intelligent, creative and hardest working in the workplace. Not just in retail but in any industry. A large percentage of those employees are on the front lines involved in the daily operation and hearing from the members. This is a vast largely un- used intellectual resource. If we could tap that intellectual database it could benefit Costco in many ways.

As an example, I have done some small tests in location #1030 asking groups of employees "if Costco would pay a cash reward could you offer one or more ideas that would make or save money for the company". Thus far the answer has always been 100% affirmative. I have not made judgments in regard to the quality of the ideas. In fact I made a point of telling people not to tell me their ideas. But some come out anyway in the course of conversation.

In the service deli, one question was, why do we ship cheese bases (pizza boxes) double boxed? Why don't they shrink-wrap them like Kirkland signature water bottles? If the large outer box was eliminated and assuming that it costs $.25 per box it would have saved over $41,000 in the US in period 11.

Another idea that came out would increase sales in books by almost 100% without increasing inventory at all. A third idea would massively increase front end productivity while maintaining or improving member service.

I asked my coworkers why they had not expressed these ideas to management? I got answers including "they are too busy with their own stuff" and "they don't care" and "there is no real process for submitting ideas. Our suggestion box looks like a shoebox and nobody ever checks it."

If you want to gain access to the more than 160,000 employees' ideas and make a serious statement that we care about what they think and making/saving money in the daily operation of Costco. I would suggest that we set up a website and/or a dedicated phone number to take suggestions.

The logistics of how to implement the system could obviously be worked out even tested on a small regional scale first. But to make it work a couple of things will need to be present. First, a sense of urgency the program cannot run around the calendar or it just becomes a suggestion box pushed into the corner. Perhaps 90 days or until the end of the fiscal year we will accept suggestions Second offer significant prizes for the best and most valuable suggestions. But make it clear prizes will be awarded based on a business decision for the company.

We are all aware that the retail graveyard is littered with companies that did not innovate and keep up with the times. Thus far in many ways Costco is and has been on the cutting edge of retail evolution. This program or one like it would utilize the huge brain power resource that is our employees and clearly shows them that we listen and care about what they think in regard to company operations.

Some examples of various programs are;

www.Ideaconnection.com

www.edisonnation.com

www.innocentive.com

www.kickstarter.com

Excellent articles on cities use of crowd sourcing is, November of 2010 Wired magazine "What 100 million calls to 311 revealed about New York" and at www.archdaily.com by Vanessa Quirk "Can you crowdsource a city?"

Two weeks went by and I didn't receive a response from anyone in regard to the memo. I thought for sure, somebody would want to know how to double books sales. We're in the business of selling books. Right?

I stopped the warehouse manager one day by the six pallets of toilet paper on the sales floor and asked if he had read my memo? "Oh you mean the third side of the coin memo?" I laughed and agreed that that might not have been the most eloquent turn of a phrase but yes that memo.

He said, "Costco is not going to start paying any sort of incentives or bonuses because the tax consequences for the employees are just too hard to deal with."

I asked him if he was serious? There could be hundreds of millions of dollars to the company included in that memo and because of _potential_ tax consequences to an employee they would not pursue it? (If you're a manager at Costco or a competitor and want to know more details about the ideas in the memo, call me, we'll talk.) After a few minutes one of the senior managers I had copied on the memo joined us. We brought her up to speed on the conversation and she said to me "Scott there's no upside to pursuing something like this for me and if it doesn't work out the downside can harm my career."

I wanted to scream! "That's exactly the point if we are not doing everything we can to get better, smarter, faster, less expensively than we are now then we'll get fat and then it's too late. You won't have a career to harm. When and why did things change? We use to be pushed to drive sales, develop our people, find new revenue, and figure out ways to be better in every way, when did this change?"

The general theme of the answers was that all decision-making and policy-setting has become very centralized in the corporate offices. Attorneys are involved in everything. In another conversation and old friend who is now a warehouse manager said it is commonly discussed that in 5-10 years the entire company would basically be run by lawyers. Managers are no longer encouraged to be innovative they are encouraged to follow the policy.

I was now suspicious that it was time to go.

I have a friend who had started a new company a few months before. He had been calling me and wanted me to come to work for him. He needed someone to cover southern Colorado. I had been ducking him for a couple of months. For the first time in a meaningful way I returned his call.

I eased into a position over 6 months while still working at Costco. Those were some long days. Then I resigned from Costco and went full time with the new company. In that first year I wrote $2.8 million in business. If you are familiar with standard commission percentages you will understand why I left Costco again. But, I still feel the tug of Costco every day. That's why I wrote this book while working another full-time lucrative position.

# Chapter 11: Sometimes you eat the bear and sometimes the bear eats you!

Or,

"You should probably stop doing that kind of stuff."

It's now getting close to Thanksgiving/Christmas holidays. They posted two temporary front end supervisory positions. The fact that they were classified as temporary is actually a good strategic decision because if the people they selected didn't work out it would be very easy to move them back into their prior position and if they did work out it's very easy to make them permanent.

Front end supervisor is an entry level management position and many managers have passed through this position. It's intense, especially during the holidays you always have five things to do and enough time to do four. I had actually learned the front end supervisor position in a kind of backdoor fashion when I was a special projects manager and logged many hours as a duty manager. I would shadow supervisors to see what they were doing and would often hold two or three boards when supervisors opened as cashiers to handle surges in front end business.

The idea of being a front end supervisor at Christmas time sounded really fun to me and since it was posted as temporary I thought it could be like a test drive. So when planning my strategy to be selected for one of the positions I asked the front end manager what criteria would be used for choosing the people to fill the positions. She told me, correctly, that they would follow the handbook. The handbook reads;

When a job posting is needed, the position is filled by a person whose skills and abilities best match those outlined in the posting. Where skill and ability are equal, length of continuous employment is the determining factor except where necessary to comply with the Americans with disabilities act (ADA) and/or state law. Specific job posting guidelines can be found in the Rothman Workplan. Although Costco's philosophy is to promote from within, we may hire outside the company when appropriate.

There were about 25 people that applied for the two positions. The majority were just dipping their toes in the water, starting to learn the process of moving their career. The interview went pretty much like you would expect, except that I was asked what I would like to do above and beyond ordinary duties to help the front end. I was delighted with this question and immediately replied that pursuant to our previous conversations I would like to focus on converting Goldstar/Business members to executive members. If that was okay and left to me, I would do this by holding micro-meetings with cashiers, assistant cashiers and my co-supervisors. Teaching them how to approach Goldstar/business members with the idea of converting them to executive memberships.

A couple of days later I was handed an envelope which I opened to see that I had been turned down for the position. This was a form letter very much like the one I had received after interviewing for the service deli manager position. No explanation and no constructive criticism, which is understandable because you want to be careful about putting stuff like that in writing. However there were a few employees who were vested emotionally and were quite upset at being turned down. Just like with the service deli manager position before. Once again, this is an outstanding opportunity for employee development and it was absolutely frittered away.

The two women who were selected for the position were long time hourly employees at the top of the pay scale. One of them voluntarily stepped down from the position a couple of days after Christmas citing the physical strain of the position being too difficult for her and the other one had a problem getting to work on time and was also returned to her previous position. Shortly after the holidays a new posting went up for two permanent front end supervisor positions.

After the announcement of who was chosen for the positions I asked one of the decision-making managers what I could do differently in the future and why I was not chosen. She said "It was a hard decision for us. But everybody who is interested will get a chance eventually to be a supervisor." I said "So you guys didn't follow the handbook policy." She was somewhat startled by that and asked me if I was planning on taking any action? I inferred from that, that she meant legal action. To which I said "Of course not I just want some guidance as to how you guys make these evaluations so I can be better prepared the next time." To which she reiterated her previous statement. I asked if my crowdsourcing memo had anything to do with the decision. She said, "Yeah, you should probably stop doing that kind of stuff."

There is always talk among the employees (gossip) about upcoming opportunities, promotions etc. and of course there's always after action analysis. In this particular case the commonly held belief was that the two women were promoted because they were inexpensive in terms of how much extra their payroll would cost because they were already at the top of the scale. Conversely had I been promoted to supervisor my pay would have been almost double. If I had increased executive member conversions 1% it would have far more than paid for the extra cost of promoting me.

Personally I do not believe that that's the reason. I do believe, and in fact was covertly and overtly told that management was scared of me. I was told that I was too aggressive and too willing to shine a light on shortcomings in the operations of the warehouse and that it wasn't that management didn't agree but that they were unwilling to approach upper management to fix the problems and they didn't have the authority to act without the prior consent of someone up the ladder.

Around this same time there were several full-time positions posted. There was never any sort of posting revealing who received the full-time positions and the general gossip was that the handbook had not been followed or had been very loosely followed, again. This is a tragedy because it demoralizes the front-line employees significantly. Some employees are a pain in the butt to be sure, but most just want to be treated fairly and have a fair opportunity to be promoted if they so desire.

Costco has a fantastic system in place to make promotions happen and not only do they not take full advantage of it they barely use it.

If you work at Costco, right about now you are thinking what the heck is he talking about? Answer, the Rothman Workplan.

# Chapter 12: The subjective path

The Rothman Workplan is on the internal company website. It is an extraordinary volume of work. Each and every job in the warehouse from cart pusher to general manager is listed and the requirements for the position are listed. It is essentially a job description of every single job in the building. I would love to have met Mr. Rothman who authored and did the yeoman's work on the plan, unfortunately he has passed away.

The value of the plan to the company and employees alike I don't believe can be overestimated. It is literally a career roadmap through each position in the warehouse yet it is hardly used or mentioned under any circumstances in the warehouse.

As I have written there's a level of frustration among the employees about career advancement and as we will see in a later chapter there's a lack of growth in the company largely attributed to the lack of employee development.

Does anybody sense a pattern here?

The company's stated policy on awarding positions is;

When a job posting is needed, the position is filled by a person whose skills and abilities best match those outlined in the posting. Where skill and ability are equal, length of continuous employment is the determining factor except where necessary to comply with the Americans with disabilities act (ADA) and/or state law. Specific job posting guidelines can be found in the Rothman Workplan. Although Costco's philosophy is to promote from within we may hire outside the company when appropriate.

Skills and ability in the real world are subjective. Their real value is determined by the person doing the promotion or evaluation and of course, finally, the market place. Anything that can be done to reduce subjectivity will be better, for all involved.

I'm something of a sports guy and I like sports analogies. We can discuss who the better athlete in a sport is but certain measures are clear. Whose fastest, who scored the most points etc? Ultimately, that's how you decide who wins.

If I was suddenly made Poo-bah of Costco (ha-ha) we would take the Rothman Workplan just one step further and have an evaluation/test on each section of the plan. I know what you're thinking, and you're right, book learning and testing doesn't equal real-world experience but it does count for something otherwise college degrees wouldn't matter.

If you wanted to apply for the gas station or front end supervisor you would first have to take and pass the test on the Rothman Workplan section pertaining to that job. That still won't teach you how not to lose your temper when three cashiers are calling for a supervisor but it will weed out the candidates who aren't serious.

# Chapter 13: How do you spell D&D?

Damaged and destroyed or D&D is the term used to describe merchandise that is thrown away or discarded because for some reason it is unsellable. For example, one time I dropped a freshly cooked chicken on the floor in the rotisserie. You will be happy to know that I did not package it up and put it back out for sale. No, I properly disposed of the chicken in the meat render barrels. The point is that every day there is a valid reason to dispose of merchandise that's for one reason or another unsalable.

The vast majority of this thrown away merchandise is because it has reached its code date, which is the predetermined time in which it is deemed to be no longer fresh or in some way lack wholesomeness.

This is important because throwaways or D&D is a major factor in the profitability of any fresh department, bakery, meat, produce, deli, food cart, rotisserie, etc. If you remember when we started the fresh produce business we threw away a lot of product. D&D and labor are the biggest controllable expenses in the perishables department. If you want to have a profitable fresh produce business you have to control D&D.

In one of my last few weeks working at the warehouse I happen to see one of the merchandisers putting in the compactor a whole pallet of romaine lettuce and a half pallet of pineapples. That seemed like a lot of D&D.

Since I work in the same area as the fresh meat department I regularly saw how much meat went out of code and was thrown away. Now seeing the produce throwaways, collectively, I was witnessing the waste of a lot of money. It's a little disconcerting to me to see a full 50 gallon drum of salmon fillets go to be rendered. Anyway as I'm prone to do I decided to start asking questions.

One of the really great things about Costco now, that has even gotten better since my time as a manager, is that the numbers are really easy to get access to. Just a few minutes on a computer and you can "get-up-to-the-minute" sales figures on any item, at any location, region, or for the whole company.

Individual department managers are responsible for their own numbers. But only to a point because they don't do their own ordering. When you have a pallet of lettuce get thrown away and ask how that happened, of course, it's the buyers fault for bringing in too much lettuce. When I asked if anyone had contacted the buyer to let them know we had too much lettuce, the answer was "No" and as I've written before warehouse personnel are uncomfortable contacting the buyers. So it kind of goes around in a circle with nobody taking charge.

If you have been reading along you won't be shocked to learn that, I said, I would be willing to take charge. Within two weeks, I said, I would cut meat and produce D&D by 50% and by 70% in a month. The first question was rightly, how would you do that? I gave an answer that included among many things closer contact with the buyers and pointed out after a week or two it would only take me a couple of hours per day and would result in $4-8k a week in additional dollars to the bottom line. The reply, "We don't do that."

I really wrestled emotionally with writing this chapter. Throwing away $1000 of food somehow seems worse to me than throwing away $1000 worth of hard merchandise. Believe it or not, even in this great country we have people who are hungry. I think that there is a type of moral responsibility to keep fresh food throwaways to an absolute minimum. Besides, the company makes more money if D&D is low.

By the way, my last week at the company produce D&D for the entire company was almost 12 million dollars. (As a percentage about triple what it should be.)

# Chapter 14: If you're under control, you're going too slow.

Costco is going to open about 30 new locations this year. They have opened between 25 and 30 new locations a year for over 10 years and before that it was fewer per year.

The average warehouse is a little over 140,000 square feet and as large as 205,000 square feet. When I started with the company the average warehouse was a little less than 100,000 square feet.

There are several good and valid reasons to increase the size of warehouses. It takes "x" amount of space to merchandise 3000 pallets. At least one pallet space for each item carried. Then if you have fresh meat, bakery, deli, optical, hearing aids, pharmacy, liquor, auto center etc. it requires more square footage.

Then if you want to give members the best value for their membership dollar (Costco does want that) you want to make available all the extra products and services possible. So, the warehouse grows. Then we begin to be limited geographically. You can't put a 140,000 square foot warehouse in a town of 10,000 people.

Warehouses get bigger, unless you have a plan. Here's one; Build a 65,000 to 80,000 square foot warehouse in smaller population centers. This opens a huge new market. There are about 2,000 cities with populations of 50,000 or more in the USA that would support a Costco junior size warehouse.

I know that a smaller warehouse means smaller gross sales but it's easier to open more buildings in the USA than Australia or Spain. Plus, new members in a new market mean new membership revenue that goes straight to the bottom line.

We could easily put 80% of the SKUs that are carried in a full size warehouse in the smaller building by managing the floor differently. For example, you cut from six kinds of toilet paper to three, five paper towels to two, six kinds of dog food to three, 10 juices etc. believe me the residents of Pueblo, Colorado would be very happy to have a Costco junior in their town.

There is another issue as to why Costco only opens 30 new warehouses per year. Costco does not specifically addresses this in any of the press or annual reports but the scuttlebutt is, that it's because they don't have enough managers. Here is where you should recall that it used to be up to each manager to groom their own replacement in order to be promoted.

I believe this is true, that there is not enough managers available to open new buildings. It's no small thing to relocate to a new location, moving your family, you can imagine. Then with only 5% annual growth in new buildings and about that same attrition rate in management it's going to be a while to move into upper management.

Then there's one additional problem. Costco has an open door policy to approach management with problems that is covered in five pages of the employee handbook. I'm not going to reprint it here. Believe me though they make it easy to air any issues employees may have.

I had only been working about two weeks when we were told that a supervisor was being demoted and coming back to work in the service deli. Shortly after that two managers were demoted and relocated to other locations because of letters written to the corporate offices by hourly employees with grievances. I'm not passing judgment on whether or not the grievances were valid. However, I did talk confidentially and in detail with the managers involved in the situations. To a person they felt the process was unfair and one-sided and to the advantage of the hourly employees. This is a major deterrent to people who are considering getting into management. And a major reason management is unwilling to give honest, meaningful guidance to employees.

Costco has done an excellent job teaching their employees to skip the chain of command. Write a letter to corporate and get satisfaction without having to talk to supervisors and managers that you work with every day, that can be uncomfortable.

Of course the corporate office would have a different opinion. They need to be concerned about discrimination, immoral behavior and lawsuits in general. It's a lot easier to side with an employee who thinks they have been mistreated in some way and demote a manager than deal with a lawsuit.

Makes sense right?

What needs to be done is create an environment where everybody is motivated to work out and move past this sort of stuff, because it will be better for them and the company. But how would we do that?

Read on my friend, read on.

# Chapter 15: Creativity applied has many contexts.

You can't force success on anybody, but you can make it easier to rise to their own level and create an atmosphere of collaboration, where everybody wants success for themselves and the group/team. It'll be difficult to make this type of a change. No matter how positive and beneficial. People are resistant to change. But, is it worth a try?

Start Costco jr. Pick a nice market and open an 80,000 square foot warehouse. Accept very few transfers. Those you do take will be fully informed and onboard with what we are going to do.

Then every employee in the warehouse from the warehouse manager down will get paid $12-$14 per hour. At the end of the first fiscal quarter we will take 30% of the net profit for the previous quarter and pay it to the employees. All hourly employees will divide proportionally by the number of hours worked one third of the 30%. Junior managers will divide one third and senior managers will divide one third. Then each full time hourly employee will get a stock option for 1.2 shares of common stock each quarter. Junior managers get 2.4 shares of stock each quarter. Senior managers get 4.8 shares each quarter. The warehouse manager gets 9.6 shares each quarter.

Stock options can only be exercised upon departure from the company in good standing, or after 10 years an employee can exercise stock options equaling not more than 5% of their total portfolio per year.

Now, in the aggregate this does not increase payroll costs to the company. It does however put the employees largely in control of their own paycheck. Because, labor or payroll cost is the single largest controllable expense, all the employees will become personally accountable to themselves and peers to be productive. Plus, when an employee starts making noise about suing the company (they always do) the peer group will give them honest feedback about their situation.

When I was doing planning and forecasting in the old days, we used the calculation of .33% of payroll dollars was benefits. That is to say if you paid $10 in payroll, actual cost to the company would be $13.33. Today the benefit factor calculation is 50%

The cost of benefits is going up disproportionately to actual payroll. When I passed my probationary period, I was given benefits I did not need or want. I already had good insurance for my family. How many other employees are in the same situation? Why is there no opt out, or cash out option? As of this writing the Affordable Care Act is the law of the land and nobody I know really understands what that is going to mean to large companies, especially since various aspects of the law seem to be in flux. That makes it hard to have an intelligent discussion. No matter how it turns out there should be an opt out option for all benefits.

If I go out and start Costco Junior (it could happen) I would not have paid holidays. (Gasp!) I'm not looking to screw employees out of four or five days a year of pay. Instead we will take the fungible dollars that normally pay, paid holidays and roll them into the hourly dollar budget, making the hourly or bonus rate incrementally higher.

Philosophically, this is correct!

We will pay people to work. We pay a higher than average wage to people for their work, plus benefits.

We will not pay people not to work!

I was surprised to see schedules and scheduling basically done the same way today as it was 20 years ago. Sure it's a little different but it still manager intensive.

Every department has a very predictable manpower demand it's easily forecast based on sales. Premade schedules should be made weeks/months in advance and employees bid for the schedule they want based on seniority. The schedule would be done weeks in advance very little manager time would be spent. This is common practice in other industries and employees love it because they can manage their own schedule and not have to wait to set a dentist's appointment to see if there schedule request was granted.

Also this eliminates the need for a distinction between full-time and part-time status. If you want a 50-50 mix of full-time to part-time that is how the schedule is written in the computer and seniority bidding takes care of the rest.

# Chapter 16: Apples and Costcos'

You're getting the idea, I and many employees have lots more. But the current culture does not support this type of innovation. If you stop and think back to the late 70s a company was started that arguably was the most innovative since Grog the caveman started trading berries for sharp rocks.

Now, you can't reset the tables in a room without multiple layers of management saying "Okay".

I was really amused one day coming into work and posted in several locations around the warehouse were signs printed by a computer that read "We must not forget our culture and values". Over the course of a couple of days I asked about a dozen managers and supervisors what was the message intended by this sign.

Nobody had a clear, concise answer, which in of itself was interesting. But I knew what was implied. The problem is that the front line, hourly employees can't build culture. That sign needs to be in the offices of upper management, not the breakroom for the cashiers.

Here's another clue. A former senior manager with a history of successful innovation, writes and turns in several suggestions and ideas to make and save millions of dollars in the current fiscal year and it's ignored in total.

That's the current culture.

Almost 40 years ago within a few months of each other two companies were started. The first, company A was started by two guys with some help from a few others and almost no money. They had a single product in a small, almost unknown market and by most measures the two guys had no business experience.

Company B, started by a couple of guys with by most measures, considerable business experience with much more capital to start. They marketed several products in a known, massive market.

In the first few years both companies had the expected struggles and challenges. Both grew, both overall grew quickly and were recognized as successful. Both were cited as extraordinarily innovative.

Company A, Apple Inc. is today valued at a little over $700 billion.

Company B, Costco is today valued at a little less than $70 billion.

I know..... This comparison is Apples and Costcos' but, is it really unfair? I don't think so. The average person, family, household or business spends far more dollars annually on products that Costco carries then they spend on products that Apple sells. I'll leave it to you to decide.

# Chapter 17: Playing not to lose

Costco's mission statement reads as follows;

Our mission  
To continually provide our members with quality goods and services at the lowest possible prices.  
In order to achieve our mission we will conduct our business with the following code of ethics in mind:  
Our code of ethics  
1. Obey the law.  
2. Take care of our members.  
3. Take care of our employees.  
4. Respect our suppliers.  
If we do these four things throughout our organization, then we will achieve our ultimate goal, which is to:  
5. Reward our shareholders.

This is great. We didn't have a mission statement when I worked at the company before. It's a valuable tool to have standards in writing. If you use them. You, dear reader, will not be surprised to learn that in my slightly more than one year after my return to Costco included three written reviews (2 probationary and 1 annual) to me and numerous conversations in regard to the various opportunities I've written about. Not one time did anyone in management or otherwise refer or hearken in any way to the Costco mission statement.

I believe that's because it's ambiguous from the start. I will suggest one small change that will make all the difference.

To continually provide..... This is how the mission statement begins and it is too broad. If the foods manager puts baked beans on an endcap because they think it's a good deal and they leave it there for a week, then that manager has complied with the mission statement for a week in their own mind.

I would suggest a greater sense of urgency. How about; On a daily basis provide our members....

As a manager I like to ask, and expect to be asked "What have you done today to drive sales?" Or "What have you done today to reduce expenses, get more productive, bring more value etc.?"

To illustrate let's look at a specific situation through the lens of the mission statement.

You'll recall in chapter 6, a member wanted to purchase about $150 per week in special order sausage. That request was turned away even though the sausage would come from a vendor we already have a relationship with and carry their products.

Does that obey the law? Sure no problem.

Does that take care of our members? Obviously, no. Some judgment needs to be used in these situations. If a member asks for a type of pink slippers they saw in a shop in Paris. We are not going to chase that down. But in this case, one phone call or email should do. Pretty simple, right? Don't get confused here, I'm not being critical of the manager. He's doing what he has been taught.

Does this take care of our employees? No, turning down easy sales is the first step along the road to no sales.

Does this respect our suppliers? Generally I would leave it to them to speak for themselves. But I feel pretty comfortable in saying that I think they would like the additional sales.

Does this reward our shareholders? I think it's clear. No.

Costco stock has performed very well over the years. It is the darling of many prognosticators of the stock market. But, recently it has begun to move from recommended buy to hold, by many analysts. I believe that this is one of the reasons why, but let's continue.

It's easy to forget, the people who work in the central corporate offices do not generate any revenue. The people who work in the warehouses make the money that pay for everybody else's salary. So when policy is set or decisions are made by a faceless corporate entity it hurts morale on the front line.

An example, about four months after I started cooking chickens. Unfortunately, some members got sick and it was strongly believed that they had gotten sick from rotisserie chickens cooked at one location in California. Quite properly Costco leapt into action. There were daily memos and reminders about proper raw food handling with particular emphasis on rotisserie chickens. However after a few days, a 14 page memo was distributed outlining new procedures that were to be read, signed, and followed effective immediately. The problem was however, some of the new policy was impossible to implement because of the configuration of our facilities. So now, I was required to sign a document saying I would engage in practices that were impossible to do. My manager and my manager's manager were in a quandary as well. If employees didn't sign the documents and they weren't in the employees files they would be in violation of the policy, if we did sign the document and couldn't perform as outlined we were in violation of the policy.

Costco has cooked millions of chickens, at hundreds of locations for years without significant incident. Here's what should have been done. A memo sent out to the managers of all Deli departments. It would read in substance, toe the line, do what you have to do to produce a clean wholesome product like you always have, and if you can't we will get somebody who can. Period.

So why wasn't that done? Because an attorney or a battalion of attorneys has scared the crap out of corporate managers about their potential liability.

Say you want to sell chocolate chip cookies in the food cart. You run it by the attorneys. They say, consider what would happen if Mrs. Member purchases a cookie and gives it to three-year-old Johnny and he picks out a giant chocolate chip and stuffs it up his nose. At first you think this is ridiculous and asinine. But over time they beat you down. This is what lawyers do they maintain the status quo, they manage risk. And the very best way to manage risk is by not taking any. This is what it looks like when you're no longer playing to win and you are in fact, playing not to lose.

This process is incremental, it sneaks up on you over time and you might not see it unless you have been gone from the company for 10 years. But here's a possible clue, if your annual legal budget exceeds the gross domestic product of the average Third World country you are not playing to win.

Next, you have picked up already that I believe the company needs to innovate constantly. We used to do that. The company was born of innovation. As you have read there are huge, massive opportunities today and no one will take a serious look at them. Let me give you one last example. About two weeks before I left the company for the last time, my manager came to me one day and said all deli managers and rotisserie managers were being solicited from corporate for ideas to redesign the facilities in future locations to make them more efficient with special emphasis on cooking chickens faster. They said they knew it was impossible but if they could cook chickens in half the time that would be great.

She said "I know you think about this stuff all the time. What ideas do you have?" I just about exploded with ideas. She said "Hold on let me get a pad." The first thing was, of course you can cook chickens in half the time. Probably even faster but for now let's shoot for 45 minutes. You can fry a whole chicken in about 7 to 10 minutes and it's about the same in a microwave oven. So we know it can be done, now the question is how we would do it in the rotisserie. I outlined the answer for her. It would require the ovens to be redesigned and they would definitely be more expensive. She did not completely understand everything I'd said but she made notes on it along with about 10 of my other thoughts and emailed it back to corporate with my promise to be available to answer any questions. It has now been approximately 10 months and no one has contacted me.

When you cook millions and millions of chickens per year imagine the benefit of cooking them in half the time. What if the ovens cost twice as much? You need half as many, right? Plus you will be much more responsive to surges in the business have fewer out of stock situations as well as less throwaways. The list goes on and I was willing to give them the information but being a simple hourly frontline employee....as near as I could tell nobody seriously listened.

FYI, this is no B.S. If you have done a Google search on me you will have learned that I actually know quite a lot about heat transference. I've invented energy-efficient stovetop cookware and you can see videos of it online. Conduction, convection, radiation, learn it, live it, love it.

Now if you want to improve morale, or anything else, and you do, even if your company has the best morale and productivity and profits, you still want to be consistently improving. The only way to do these things is through motivation and teaching.

We talked about motivation already. There has to be some fun.

If you want to be really good at something, teach it. Teaching forces you to become masterful. Just a word here about the difference between teaching and training. Training, basically responds or reacts to stimuli. My dog responds to me saying "sit" by putting her butt on the ground. If I could teach her, she would realize that I want her out of the way for a few seconds and she would sit on her own.

When you train an employee how to move a pallet of shoes more efficiently that's nice. If you teach that we move all pallets as efficiently as possible and why we do that. If then you show them how that increased efficiency translates straight to their larger paycheck. Now, you have a vastly more valuable employee.

The skies the limit when you teach your employees what you want them to know. Think for just a minute about the possibilities.

Imagine this, every employee from the newest cart pusher to the most senior cashier thinks like a warehouse manager. Focused on growing and developing the business.

On one hand if you're weak manager you're thinking "Oh crap, if all my employees know what I know, think what I think, they'll be questioning everything I do". That's a possibility, and you are going to have to develop some new skills also. On the other hand, it's a process and it won't happen quickly. The world is full of people who manage groups of people who are smarter and know more than they do, that's why they call it management.

Costco's upper management visit and walk the floor of every warehouse regularly. This keeps everybody on their toes. Believe me when the CEO and/or VPs are coming for a visit everybody's standards are heightened. Nine out of ten times when they visit it's before 4 PM on a weekday and never on Saturday or Sunday. Do you know why? I think you do. Most of these guys came up through the ranks but it's been 15 or 20 years since they closed a warehouse. Otherwise they would see we are spending crazy amounts of labor dollars folding clothes or they would see the frustrated members trying to get through the main aisle traffic jams on the weekends and they would think maybe, we should move some or all of the demos to the bulk wall aisles. They would see lots of things.

Let's talk inventory for just a minute. I was never the receiving manager but, you don't have to be a genius to see shipping and receiving is many times more efficient now than when I was a manager before. Just-in-time delivery should be right around the corner. So, why do we have $7-$11 million of inventory in a building that does $2 million per week in sales? As a shareholder I would like to have the interest on $2 million in excess inventory, in 600 locations.

I'm a great dad and husband. I'm a creative, inventive businessman. I'm not a particularly good writer or wordsmith. That's one of the reasons I price this book the way I did. But how much is it really worth? If you have been counting as you read through it, you are in the billions of dollars by now. And, here's the thing.... I'm not even the smartest person in the one single warehouse I worked in for the last year, out of more than 600 warehouses. (Just one more time, why isn't it 6000 warehouses?)

Nobody likes the bright light of scrutiny shined on them and I don't want to embarrass anybody. So when I got this book about to this point I sent a draft copy to the CEO shortly after he delegated it to the RVP for my area. There was no response.

There are super smart, creative people working at corporate. As I've written and shown they are out of touch with what's going on in the warehouse operations. And, no matter how smart they are, their collective intelligence can't begin to compare to the properly harvested collective intelligence of all the employees in the warehouses.

If you, in an honest meaningful way listen to the front-line employees the value of what you will receive is incalculable. Plus, when you really listen to people and engage them, you solve about 60% of your employee problems. If you engage them in a serious manner and properly reward them for the value of their contribution you eliminate about 90% of the remainder.

Be honest with your employees. If you're going to fill a position with someone specific don't post the job. People get their hopes up then realize they've been lied to then the gossip starts and morale suffers.

You must create and offer a clear path to promotion. Just like in school, if you take these classes and pass, you get promoted to the next level. If you take and pass the test(s) on the Rothman workplan, have "x" seniority and no written violations in your file, you get on the list. When your turn comes up, you get the job (promotion) take the subjectivity out of the formula. Then when the employee gets the opportunity, success or failure is up to them.

Every manager should, with specific intent be a mentor to at least one employee who wants to move into management. Always, always be teaching and thank your lucky star when an employee asks a question. This is an opportunity not a pain in the butt.

If you're working in the corporate offices and have never worked in a warehouse it should be a requirement that you do for at least 30 days. If it's been 10 years or more since you've worked in a warehouse you should have to for at least a week. And if you're a corporate officer you should seriously consider going through the hiring process and spending a week in operations. This is how you will learn what really makes up our current corporate culture.

Lawyers are not retailers. Listen to the attorneys, be aware of possible liabilities. But if you listen to closely you'll end up doing nothing because that safe.

Look at the "Buddy" program. If we don't take it seriously it just feels like a policy that shows a new employee that they are not cared about or taken seriously. At the same time focus on new employee training. A new employee should be made part of the team first.

Maybe most importantly, be open to innovation and acknowledge employee ideas. Nothing says, we respect and care, like listening to an employee with an idea. Conversely nothing says you stink quite like ignoring an employee who cares. Employees either have pride or feel used there's not much in between.

A lot of you at this time are feeling somewhat uneasy. I've got some good points but how could they practically be put into use? Some of you just think I'm full of baloney. So here's the challenge. Start two Costco jr. locations, in southern Colorado, and let me run them. I get to pick my staff. I will work for free for a year of operation. I know, it will probably need to be $1.00. We are going to implement as much as possible, all of the ideas here in this book plus some others. If at the end of the year's operation those two locations are not number one and two in member satisfaction, productivity and profitability then I will leave and whatever we have accomplished is yours to keep, no charge. If we do finish number one and number two you have to pay me for the year and have a good faith conversation about what we're going to do going forward. This is what they call the end. Look for volume 2 coming soon. Best regards; spivonka@q.com

# Coda

Okay, I really was about to wrap this up. Then I saw one of those articles on the Internet that they throw at you about random stuff. It was, "The reasons people hate shopping at Costco". At first I thought it would be some made-up issues by someone needing to meet their writing quota for the day. But it was stuff that you hear pretty regularly when you're a manager in the warehouse. So I thought I would go ahead and addressed these (no extra charge) because most of this stuff has been member issues for years.

First, only one credit card option.

I find this interesting because when the company started it was cash or check only. But here's the problem with credit cards. Most of them charge the retailer a transaction fee that destroys the already thin margin Costco operates on. American Express doesn't charge a transaction fee. which is a major reason Costco does accept American Express. But there are problems with American Express also and I think soon that option is going to go away.

Back in the day, I outlined a business plan at one point for Price Club to get into the credit card business. It wasn't the right time and Robert Price had a philosophical issue with credit cards in general. But none of that changes the fact that lots of members for various reasons want to use them and they know and expect that in one way or another it costs money to use credit cards. They are perfectly fine with giving us that money.

Times and technology change, now there's a magnetic strip on your membership card that contains your basic information. Of course when you purchase a membership we get all the information necessary to find you if you write a bad check.

So here's a possible solution. Members who have been executive members for at least one year would be extended credit equal to their monthly average purchase. At a reasonable interest rate. It's a fairly simple change to the P.O.S. software and the administration would be paid for either through the interest or a surcharge on the membership. Perhaps more importantly this allows the solution to the next problem.

Long checkout lines and no express line.

We have heard this issue from the very beginning. Here's the thinking, express lines typically are where you go if you have 10 items or less. We don't want you to buy only 10 items!

Okay, so you change your shopping habits and start making only weekly or monthly trips. It's still kind of irritating to push your cart to the front end only to see that the lines are 5-6 members deep. Then you get home only to discover you forgot two or three items. Now the question, is it worth the Costco savings to go back and stand in the long lines or pay the extra money and get through faster at a conventional store. Get the point?

Set up four cash registers, back to back and side to side. Like a square with each cashier having a single cashier to the side and one behind them. Now take away the cashiers, because these are express _, self-checkout_ lines.

An executive member with the line of credit attached to their membership can go through the self-check express line very quickly. The receipt from these lines are printed on a unique color paper so that member service at the door is aware this was a self-check member. We will still need a single cashier to work these four lines for various reasons. But now is where we really enjoy the flexibility of the system. One of the registers still has a complete cash drawer so that if nobody is using the self-check service the cashier can open as regular line.

Right now a good cashier with an assistant processes about 55 members per hour. Set up the lines like I described and one cashier will push 200 members per hour and the members will be happier.
