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This case was written by P Mohan Chandran, under the direction of Vivek Gupta,ICFAI Center for Management Research (ICMR). It is intended to be used as thebasis for class discussion rather than to illustrate either effective or ineffectivehandling of a management situation.

The case was compiled from published sources.

Sears Logistics ManagementPractices

© 2004, ICFAI Center for Management Research (ICMR), Hyderabad, India.

Distributed by The European Case Clearing House, England and USA.North America, phone: +1 781 239 5884, fax: +1 781 239 5885, e-mail: ECCHBabson@aol.com.Rest of the World, phone: +44 (0)1234 750903, fax: +44 (0)1234 751125, e-mail: ECCH@cranfield.ac.uk.All rights reserved. Printed in UK and USA. Web Site: http://www.ecch.cranfield.ac.uk.

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SEARS LOGISTICS MANAGEMENT PRACTICES

“For retailers, getting the right merchandise into the store at the right time is critical to customer satisfaction and our success.”1

- Dave Giometti, Vice-President, Vendor Relations, Sears, Roebuck & Company.

INTRODUCTION The US retailing giant – Sears, Roebuck & Company (Sears) was in deep trouble during the early 1990s. The company had experienced a declining trend in revenues since the early 1980s. The extent of the problem became apparent when Sears registered its biggest ever loss of $3.9 billion in the company’s 100 year history in fiscal 1992. In the same year, Sears’ merchandise division, contributing more than 90% of the company’s total revenues, reported a loss of $1.7 billion. In the course of fiscal 1992, Sears hired an outsider – Arthur Martinez (Martinez) to head its merchandise division. Martinez initiated drastic changes in the merchandise division, with the result that the division was able to make a profit in the very next year. Among other restructuring measures, Martinez focused on streamlining the logistics management practices at Sears by consolidating distribution centers, increasing warehouse automation and reducing transportation costs. Sears was also able to shorten the distribution cycle, improve logistics service levels, and centralize merchandise returns. Martinez efforts to make Sears’ logistics management system more efficient were carried forward by William Gus Pagonis (Pagonis), Executive Vice-President, Logistics who tightened the company’s logistics through the 1990s and into the early years of the new millennium. Under Pagonis, Sears became one of the few retailing companies which applied military logistics strategies in practice. Sears had always been among the first movers to adopt modern IT tools and Internet-enabled technologies in logistics management. In 2001, when it installed Wireless Mobile Systems in its Retail Replenishment Centers (RRCs), Sears emerged once again as one of the first retailing companies to use mobile systems for managing logistics. Commenting about logistics management, Pagonis remarked, “Logistics is reaching a new plateau. The supply chain is the last frontier – the last place where you can take out cost, improve service, and tip the balance on a P&L statement.”2 BACKGROUND NOTE Sears, Roebuck & Co. was founded by Richard Sears (Richard) in 1886. Richard worked as an agent in the Minneapolis and St. Louis railway station in North Redwood, Minnesota. He used his spare time to sell lumber and coal to local people. In 1886, he once received a shipment of watches from one of the neighborhood jewelers at Redwood Falls. Richard bought the watches himself and sold them at a substantial profit to other station agents. Recognizing the profit potential of this type of trading, Richard soon ordered more watches for reselling. By the end of 1886, Richard had started a watch retailing business, known as R.W. Sears Watch Company, in Minneapolis. In 1887, Richard relocated the company to Chicago and appointed a watchmaker, Alvah C Roebuck (Roebuck) as his partner. In 1893, Richard renamed his company ‘Sears, Roebuck and Company.’

1 In the article “Sears Expands QRS Trade wave Message Exchange Services to Serve All Sears Retail Formats and Vendors,” posted on the website www.qrs.com, April 10, 2001. 2 In the article “Supply Chain Hero,” by Eric Hellweg, Business 2.0, January 2002.

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In the early 1900s, Sears leased many buildings in Chicago. In 1901, Sears started construction on a 40-acre, $5 million mail-order plant and office building on Chicago’s West Side. The mail-order plant with a floor space of more than three million square feet was the largest business building in the world at that time. By 1905, Sears succeeded in developing accurate catalog descriptions as well as its high-quality merchandise. During the next two decades Sears witnessed a significant growth in its mail order business with very few competitors. In 1924, General Robert Wood (Wood) was appointed as the President and Board chairman of Sears. Wood started opening retail stores to compete with chain stores that were rapidly spreading throughout the US and affecting Sears’ mail-order business. In 1927, Sears had 27 retail stores in operation. By the late 1920s, the urban residents in the US had begun to outnumber rural residents, and city dwellers preferred to shop in retail stores. Despite the Great Depression, Sears continued to open stores during the 1930s. In 1935, Sears began to open catalog sales offices in towns that were too small to support retail stores. Later, the company launched an additional catalog operation – the independent catalog merchant program – in which a person operated his or her own store to sell Sears merchandise. By the late 1930s, the number of retail stores carrying Sears merchandise had increased to 400. In 1941, Sears was operating more than 600 retail stores. In 1942, Sears opened its first retail outlet outside the US, in Havana, Cuba. In the 1940s, Sears opened stores and sales offices in Central and South America and in Europe. In 1953, Sears entered Canada through a joint venture with Canadian merchandising company, Simpsons Limited; the joint venture was known as Simpsons-Sears Limited. The venture was later renamed Sears Canada. In the mid 1970s, Sears was struggling to increase sales due to the emergence of competitors such as Wal-Mart and Kmart. Under the leadership of Edward Brennan (Brennan), the CEO of the merchandising division, Sears launched the “store of the future” program in 1983. The program sought to renovate 600 Sears’ stores to offer a more comprehensive collection of merchandise. In 1986, Brennan became the president and CEO of Sears. By the late 1980s, Sears had also entered into financial services business. Its business divisions were divided into – Sears merchandise group, insurance activities and corporate businesses and ventures. In 1989, in an attempt to compete more effectively with its rivals, Sears turned to a new one-price strategy. The company shut down 824 stores for two days, re-priced nearly 50,000 items and opened its business with price reductions of up to 50%. Sears also launched a dramatic media blitz, airing more than 2,000 TV and radio spots and running 900 newspaper advertisements over a three-week period. These efforts were unsuccessful, as Sears’ merchandising division3 suffered a 60% decline in net income to $257 million in 1990. In order to increase profitability, Sears attempted to position itself as a powerful specialty merchant. Brennan also began efforts to reduce costs by streamlining operations. In 1991, the management implemented several cost cutting measures, saving around $600 million. Brennan also announced that the company would be concentrating on renovating its 868 retail stores to attract more customers. However, in spite of Brennan’s efforts, in the fiscal year 1992, Sears reported a huge loss of $2.98 billion, out of which $1.7 billion was reported by its merchandise division (Refer Exhibit I). By the end of 1992, Sears had accumulated losses of $3.9 billion. 3 The merchandising division consisted of retail stores offering products related to home, apparel, auto lines and also included Sears’ credit card business for retail customers in the US and international operations in Mexico and Canada. Apart from merchandising division, Sears was also into insurance business that offered insurance products in Auto & Homeowners, business, life categories and mortgage business.

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In its efforts to restore profitability, Sears’ governing board changed the leadership of its ailing merchandising division. In August 1992, Martinez, vice chairman of Tony Saks Fifth Avenue, joined Sears’ as President of the merchandising division. He became the first outsider ever to head this division. Martinez initiated a series of measures to turn the loss-making division around. He announced the closure of 113 stores that were losing money and downsized the workforce by more than 50,000 jobs. He also closed Sears’ unprofitable catalog business in early 1993. Within six months at the top position in merchandising, Martinez was able to pinpoint many flaws in the supply chain management practices of the merchandising division. He noticed that long time suppliers of Sears were charging high prices leading to higher costs for the company. While rival Wal-Mart was getting more efficient in its buying practices and reducing costs, Sears continued to use outdated buying practices. To change this, Martinez recommended the establishment of the ‘Sears University,’ wherein the company’s staff was re-trained in negotiating practices and other buying methods. Martinez also focused on improving Sears’ sourcing practices. A strategic sourcing initiative established in 1993 reviewed more than $3 billion of expense areas and engineered long-term savings of more than $250 million by focusing on the cost of goods, operating expenses and capital expenditure. Sears reviewed various categories of products that included tires, batteries, tractors, repair parts and paper. Martinez also felt the need to improve Sears’ logistics and inventory management practices in a significant manner. To revamp the logistics and inventory management system, Martinez appointed Pagonis, former General and Chief of US military logistic operations during the 1991 Gulf War, as Executive Vice-President of logistics, in October 1993. REVAMPING THE LOGISTICS MANAGEMENT SYSTEM Martinez had been highly influenced by Pagonis’ account of practical applications of military logistic strategies during the Gulf War, in his book – Moving Mountains: Lessons in Leadership and Logistics from the Gulf War. At Sears, Pagonis was made responsible for supervising the logistic systems that enabled Sears’ stores deliver numerous types of products to 5,000 homes per day, with a total of 2,50,000 truckloads of goods per annum. Pagonis was also in charge of vendor relations, transportation, storage, distribution, international logistics, home delivery services and synergization of IT systems. With Sears owning 30 large distribution centers and 90 smaller storage outlets, Pagonis had to ensure uninterrupted supply of over 1,00,000 different products to more than 2,000 department, home and automotive stores in the merchandise division (Refer Exhibit II). Before Pagonis joined Sears, the company’s logistic function was highly decentralized; for this reason it was very difficult to locate the origin of a logistical problem. With the assistance of Martinez, Pagonis centralized Sears Logistics Group (SLG), so that it acted as a focal point for all the company’s logistics-related problems. In December 1993, Pagonis implemented a set of military logistics practices at Sears. He modeled Sears’ logistics chain into four unique independent logistics channels – full line store logistics, off-mall logistics, direct delivery and specialized channel – to serve three types of customers, namely, Sears’ stores, the retail consumers and Sears’ business customers. The model optimized the logistical operations and resources delivered to its channels by more than 4,000 suppliers. This arrangement processed more than 500 million items of stock through 30 strategically positioned distribution centers to over 2,000 Sears’ stores. More than four million items were supplied to customers’ homes including furniture and domestic products and

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appliances. For this, Sears used the services of 135 market service operators, which had expertise in home delivery services. All the logistical operations were facilitated by a strategy team that aimed for improvements in the logistics system, and a finance team that converted the logistical improvements into profits. Pagonis also implemented the ‘three ups and three downs rule,’ which he had used in the military. According to the rule, every week, executives had to list three positive things that happened during the course of a project or within their workgroup, and three negatives, for which the executive had to offer a possible solution. Pagonis felt that this practice ensured the flow of negative information to the top hierarchy, who could take corrective steps to rectify the problems. Executives submitted their three ups and three downs on 3-by-5 index cards. Pagonis had designed a distinct pattern on the corporate network for employees to submit virtual cards in an electronic form. This enabled Sears to put an end to the large piles of long memos that accumulated on a person’s desk. Pagonis received 50 to 60 index cards from employees every day, and he scanned these thoroughly. One of the major initiatives Pagonis took in order to make the logistics system at the merchandising division more efficient was ‘cross-docking.’ In cross-docking, Sears placed a purchase order with a vendor through Electronic Data Interchange (EDI)4. After fulfilling the order, the vendor forwarded an electronic Advance Shipment Notice (ASN) to Sears. The ASN gave Sears information about the date and particulars of shipment (such as the total number of boxes, and the nature and quantity of goods in each box). The vendor then shipped the goods. The goods were labeled with bar-codes and contained other details such as the size, order number, style or type of goods and the place of shipment. On the arrival of goods at the distribution center, the bar-code labels were thoroughly inspected and receipts were generated; these were later cross-checked with the electronic ASN. The goods were then sorted out and passed through a rapid conveyor belt from where they were directly transported in trucks to Sears’ hard and soft line department and home stores. Since the goods were dispatched to the stores within a short period of time and were not stored at distribution centers, Sears was able to save on storage costs. Describing the benefits of cross-docking (Refer Exhibit III for various types of cross-docking), Giometti said, “The entire process takes 15 minutes. It used to take two days earlier. Cross-docking eliminates many of the activities you would need to do to put the goods away and then pick and pack them for store replenishment. Thanks to cross-docking, Sears has been able to handle more inventories without building more distribution centers.”5 By 1995, Sears was cross-docking about 40% of its goods and was contemplating increasing it further, since it helped the company in managing more inventories using the available storage facilities. These efforts to revamp the logistics and inventory management system delivered positive results. By 1995, Sears was able to reduce its logistics costs by $45 million annually. Sears made a dramatic turnaround, reporting a net profit of $1.8 billion on revenues of $34.89 billion in fiscal 1995 (Refer Exhibit IV). In 1995, Brennan retired and Martinez took his place as CEO. In their efforts to further cut down the supply chain costs, Martinez and Pagonis decided to invest heavily in the most advanced information technology (IT) tools and use the Internet. USING IT TOOLS AND INTERNET TO MANAGE LOGISTICS By the end of 1995, Sears had implemented an electronic ordering system, which connected the company’s ordering system with every individual supplier’s ordering system. Sears also introduced a Strategic Performance Reporting System (SPRS). SPRS was a part of five-year 4 The transfer or exchange of data between different companies using networks including the Internet. 5 In the article “Start Small Think Big,” by Lauren Gibbons Paul, Darwinmag, June 2001.

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Strategic Information Systems Plan (SISP) launched by Sears in 1994 to modernize its operational systems. SPRS traced product flow starting from the distribution centers to the stock keeping unit at various locations. Sears also developed a system that enabled suppliers to verify the status of an invoice at any given time. The company also gave access to SPRS to its suppliers, so that they could verify their product sales and practice just-in-time delivery. Pagonis worked with Jerry Miller (Miller), VP, technology, for SLG to minimize home delivery delays. The duo wanted to strengthen the logistics system to overcome the problem. Integrating diverse factors into a single system was a difficult task; it involved synergizing Geographic Information System (GIS) technology with algorithms to develop a detailed delivery system. Explaining the difficulty, Miller said, “We basically had to develop new algorithms. We had to look at a number of different dynamics: types of products, times of day, delivery schedules.”6 The new system had to allow for things like the larger amount of time required for dispatching a washing machine compared to a television, or that fixing something on a third floor would take more time than the first floor. All these incompatible factors had to be synergized to optimize scheduling and prepare a delivery route and schedule for every truck. In 1997, Sears introduced the Enhanced Home Delivery System (EHDS). The system linked GIS technology with a decision support system (DSS) tool. This enabled the company to determine the shipment date for customers at the point-of-sale. The night before the scheduled shipment, EHDS identified the most convenient and shortest route that a truck had to travel through and a Sears’ salesman intimated to the customer the expected time of delivery. The EHDS designed a map of the route that each delivery team had to pass through. The teams could also print their maps and take it with them for reference. On the shipment day, Sears traced the movements of each driver with the help of Voice Response Unit (VRU) application systems. Drivers rang up a standardized number – 800 and reported their arrival and departure times to an electronic routing computer. This information instantly got notified to a tracing database, which was captured by ‘route monitors.’ When a driver was getting late and was about to reach the delivery destination, the consignment getting delayed turned yellow on the monitor’s screen, signifying a warning. When a driver conveyed the information that for some reason he/she would not be able to deliver the shipment, the shipment he was handling turned red on the screen. This was a signal for the route monitors to ship another truck, or to re-program the original shipment. The system also adjusted itself for constant traffic patterns. If repair work on any road impeded a route, or heavy traffic slowed down the movement of goods, the driver passed on the information to that particular market’s manager. The information was later feeded into the geographical database to optimize future route scheduling. When the VRU system was introduced at Sears, delivery teams and drivers opposed the technology strongly, claiming that they were more familiar with the problems of the routes than a computer, since they used those same routes all the time. The top management of Sears Direct Delivery Channel (SDDC) organized a training session known as “EHDS 101” to mellow the resistance of drivers and demonstrate the benefits of the system to them. The training session finally won the support of drivers and the VRU system could be implemented. Sears was again in the forefront of applying the latest IT tools for managing logistics when it adopted the Sophisticated Logistics Algorithms (SLA) systems in 1997 to expedite home deliveries. The SLA systems contained delivery status charts which closely tracked home deliveries, supplier shipments and loaded trucks. The logistics team could analyze the timings of emptying the boxes of a truckload and trace the flow of products in transit. By using SLA, Sears’ on-time delivery performance increased from 78% to more than 90% and resulted in significant cost savings. Sears also introduced a novel dynamic load building and routing system, aimed at expediting the shipment process. The system was designed to help in routing trucks from central

6 In the article “Stand and Deliver,” by Daintry Duffy, CIO Enterprise magazine, September 15, 1999.

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distribution centers to satellite centers and provide necessary information and guidance to the distribution team in loading each truck based on the shipment schedule. In September 2001, Pagonis established a Disaster Operations Center (DOC). DOC designed ‘contingency plans’ for the company’s logistics management team. The first phase of disaster planning program comprised setting up of an ‘operational contingency cell (OCC),’ which included two employees who acted as a hub for effective and speedy communication during disasters. Once the OCC was set up, the truck drivers could call the OCC to appraise it of any logistical problems, and receive guidance from the center. Whenever US faced any catastrophes such as cyclones, earthquakes, floods, snowstorms, or hailstorms, Pagonis and his team, swung into action with preplanned solutions to overcome crisis in the shortest time with minimum possible losses. USING MOBILE SYSTEMS TO MANAGE LOGISTICS Sears had seven RRCs, which supplied replenishment stocks to more than 870 retail stores all over the US. The RRCs were equipped with automated equipment like conveyor belts and bar-code scanners. The conveyor belt could move the goods out at a speed of 10 feet per second. The merchandise flowed in and out of the seven RRCs 24-hours a day and 7-days a week. In 2001, the RRCs transported approximately 2.7 billion pounds of goods to various stores. On an average, one RRC controlled more than 25,000 pallets in a single day and most of them were stored for not more than a day or two. When the goods landed at the RRC, the shipment was scrutinized to check the type of products supplied and transported to a warehouse bin, which could be accessed by the replenishment managers. The replenishment managers scanned the goods to record the consignment and destination. They also ensured that the quantity and quality of goods had been supplied correctly. In late 2001, Sears felt the need to manage its logistics at the RRCs more effectively to derive the best possible results from its nearly 4,500 suppliers. The company got Wireless Mobile Systems (WMS) installed in the RRCs. Sears made a thorough appraisal of the situation before the decision on a new mobile system, by considering various factors such as the integration of the new system with RRCs scanners, the network link between the server and hand-held devices and the speed of WMS. WMS enhanced the authenticity of inventory information and shipment details at the RRCs and retail stores. WMS provided replenishment managers with access to exact and real-time information on the inventory level of any product at the RRCs. By using WMS, Sears was able to eliminate outsourcing of goods during peak demand periods. The support call rates fell drastically by over 90% within a six months period. The installation of WMS in the RRCs improved the RRCs’ productivity by over 30%. Almost all system-related errors were eliminated. Explaining the benefits, Bryan Howell, a hardware specialist at Sears Logistics, said, “Based on an 8-hour shift, the old system would run 30 to 40 errors a day. An error would lock up the entire system, and it would be a lot harder and a lot longer to reboot the system to get it up and running again. With the new system sometimes you won’t see an error for a couple of weeks. It’s a major difference.”7 The overtime rate of employees also fell considerably since employees were able to fill shipments in their regular shifts.

7 In the article “Sears’ Logistics Wireless System Paid For Itself in Eight Months and Increased Productivity by 30%,” by Peter Strozniak, Frontline Solutions, October 2002.

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One of the major benefits of WMS was in slotting operations. Before the WMS were installed, slotters (warehouse workers) received the pallets from the product manufacturers through trucks and had to put them in a specified place in the RRCs. A lot of time was spent and more paper work was required to determine the position of various products to be placed in the RRC (when the products came from the suppliers) and again locate them back (when they were to be sent to the stores). The problem was further aggravated due to the volume of shipments being handled. In 2001, the seven RRCs controlled approximately 250,000 trailer loads of goods. The WMS enabled easy location of goods for delivery and reduced paperwork significantly. The real time information supplied by WMS enhanced the logistics efficiency of the RRCs. Howell explained, “The old system didn’t give us real time information for available bins and locations in the warehouse. With the Pocket PC we have the ability to go real time and it actually eliminates human error.”8 RECENT INITIATIVES – IMPLEMENTING CPFR Sears shared the benefits of Internet and IT tools with its suppliers to a very great extent. For instance, Michelin Tires (Michelin) had supplied automotive tires to Sears for more than three decades. Earlier, the tire inventory levels of Sears and Michelin were always kept high. Analysts attributed this to the lack of coordinated planning between Sears and Michelin and erroneous demand forecasts for tires. To overcome this, Sears embarked on the implementation of the Collaborative Planning, Forecasting and Replenishment (CPFR)9 system in June 2002. The execution of CPFR comprised four stages. In the first stage, cross-functional teams of both the companies were trained in the best practices in CPFR. In the second stage, the IT divisions of both the companies tracked product information flow and recorded data patterns that involved product sales history, demand estimations and inventory levels. In the third stage, the two sides collaborated in selling only private-label tires. In the fourth stage, the companies broadened CPFR implementation to accommodate the complete range of Michelin products. The CPFR system allowed access to information through the Internet on a spreadsheet that was tailor-made to notify information on each product. Sears also allowed Michelin to constantly monitor its inventory levels in its storage outlets and distribution centers. Whenever the stocks at the distribution center went below the allocated levels, the CPFR system intimated Michelin through an e-mail. By sharing critical supply chain information in real time, the two sides collaborated to design an efficient replenishment plan. Implementing CPFR helped Michelin to identify the gap in demand forecasts in advance, check the sale of tires at Sears’ stores in real-time, compare the sales with the current stock of tires at Sears and increase/decrease its production accordingly. CPFR enabled Sears and Michelin to derive optimum advantage from their combined resources. The chances of excess inventory or stock-outs were reduced significantly while all the customers’ demands were met successfully. Sears entered into similar collaborative relationships with many of its top suppliers. Commenting about the collaboration, Hank Steermann (Steermann), Senior Manager of supply chain for Sears, said, “Sears has always worked in partnership with its largest vendors to help meet customers’ needs.”10

8 In the article “Sears’ Logistics Wireless System Paid For Itself in Eight Months and Increased Productivity by 30%,” by Peter Strozniak, Frontline Solutions, October 2002. 9 CPFR is a process modeled to integrate supply chain partner processes for errorless forecasting and strong control of production and retailing capacities and inventories. 10 In the article “Psyched Up,” by Peter Buxbaum, Operations & Fulfillment, March 1, 2003.

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Analysts felt that the use of the latest technologies like CPFR gave Sears a tremendous competitive advantage. Michael Dominy, analyst at the Yankee Group, a technology consultancy firm, said, “The benefits are clear – inventory goes down, sales increase and cycle times shrink. CPFR enables companies to improve existing supply chains and discover ways to plan and replenish products more effectively. Enterprises not embracing collaborative demand planning will be at a cost and service disadvantage by late 2004.”11 QUESTIONS FOR DISCUSSION: 1. In 1992, Sears was in a deep financial trouble. Among other restructuring efforts, the

company focused on its logistics management system to reduce costs. Explain in detail how Sears adopted military logistical practices to manage its logistics system most effectively.

2. “Sears has a long history of pioneering the use of technology as a means to streamline its

operations and provide the very best to its customers.” Discuss the various technologies used by Sears in logistics management. What benefits did the company derive by using IT and Internet-related technologies for managing its logistics system?

3. “Logistics is reaching a new plateau. The supply chain is the last frontier – the last place

where you can take out cost, improve service, and tip the balance on a P&L statement.” In the light of the statement, what trends do you visualize in logistics management in the near future? Critically analyze the role of emerging technologies for managing the same.

11 In the article “The Time for CPFR is Now,” iSource magazine, February 5, 2003.

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EXHIBIT I

MERCHANDISE DIVISION (1994)

GROUP PARTICULARS Stores – This were called as full-line department stores with around 80,000 sq ft selling area, located in malls. These stores offered all merchandise lines of the company. Apparel (Softlines) – The company offered full-line of fashionable apparel for whole family. In addition it also offered cosmetics, home fashions. Both national and private brands of Sears were made available. Private brands included – Canyon River Blues, Fieldmaster, Trader Bay and Circle of Beauty.

DEPARTMENT STORES

Hardlines – In this category, Sears offered full range of electronics, appliances, and home improvement products and services including its private brands – Kenmore appliances, Craftsman tools and Weatherbeater paints. Sears Hardware Stores – The hardware stores offered home repair products including Sears’s craftsman tools and national brands. These stores occupied around 20,000 sq feet of selling space. HomeLife Furniture Stores – These stores offered wide range of furniture and accessories. These stores were generally located in the malls with an average selling space of 30,000 sq ft.

HOME STORES

Sears Dealer Stores – These stores were located in the smaller towns and had around 4,500 sq ft selling space offering electronics, lawn and garden products, hardware and automobile batteries.

HOME SERVICES

Under home services, Sears offered repair services for all popular brands through a network of service technicians. Along with repair services, the company also offered home cooling and heating systems, siding, roofing, pest control, carpet cleaning and other home improvement services. Sears Tire Group – Under this category Sears offered Tires, batteries and related services through Sears Auto centers, and Tire America Stores.

AUTOMOTIVE STORES

Parts Group – Under this category, Sears offered automotive parts and related services through Western Auto stores and Parts America stores.

CREDIT OPERATIONS

Sears credit operations included Sears Card which enabled customers to shop on credit in all Sears’ stores. By 1995, Sears had around 38 million Sears Card customers.

Source: Sears Annual Report 1995.

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EXHIBIT II

PROFIT & LOSS STATEMENT OF SEARS (1992-1993) (in $ million)

PARTICULARS 1992 1993 Revenues Merchandise Sales & Services 29,829 27,171 Credit Revenues 3,114 3,273 Total Revenues 32,943 30,444 Costs & Expenses Cost of sales, buying & occupancy 22,218 19,918 Selling & administrative 8,108 7,088Depreciation & Amortization 49 493 Provision for uncollectible accounts 91 821 Restructuring 2,758 Interest 88 1,043Total Costs & Expenses 35,377 29,363 Operating Income (Loss) (2,434) 1,081 Other Income Gain on sales of subsidiaries stock PBIT & minority interest (2,320) 1,180 Income Taxes (Benefit) (830) 421 Minority Interest Income (Loss) before cumulative effect of accounting changes

(1,472) 752

Cumulative effect of accounting changes (1,505) Group Income (Loss) (2,977) 752

Source: Sears Annual Report 1994.

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EXHIBIT III

TYPES OF CROSS DOCKING

Cross docking is a distribution method structuring the relationship between suppliers and distributors at any given stage in the supply chain. Cross docking defines a physical exchange of inventory between two parties, whereby goods are sorted on or near the docks without ever going into storage. As a key element of ECR (Efficient Consumer Response), cross docking offers an alternative method of handling the product, which can lead to greater distribution efficiency and cost effectiveness in a distribution network. This, in return, leads to a stronger relationship between manufacturers, distributors and retailers. There are several versions of cross docking, ranging from vendor/third party pre-assembled orders, which may create additional invoice and paperwork handling, to high tech conveyor sortation systems, which can require expensive initial outlays. All have the benefits of reduced inventories and accelerated product flow. The four cross docking methods include: • The vendor/third party preassembled orders method requires the manufacturer or a third

party to pre-build store pallets based on actual retailer and distributor orders. This method is usually used in a low value product lines that are consuming valuable warehouse space, or for slow moving stock-keeping units (SKUs). This method presumes a third party will process store orders that can be labor intensive to administer.

• The reverse line picked method requires the cross-dock pallets to be deselected from the

received pallets onto empty pallets by case. This method involves selecting orders at the source warehouse in total ordered quantity so that they can be deselected at the distribution center one order at a time until all store orders are fulfilled and inventory is down to zero. For example, the pallets can be sorted by store, by customer or by carrier. In this method SKUs tend to be slow, or with short shelf life and low in cubic volume.

• Flow-through involves identifying cross-dock items to be stored in a flow-through location

within the warehouse. As orders are released for selection, flow-through SKUs are matched to turn inventory items, usually in pallet or half-pallet (layer) quantities. If no match is necessary then orders can simply flow through from receiving onto shipping trailers.

• Using the high speed conveyor sortation method requires a high level of automation within

the warehouse management system in order to allow the manufacturer to manage its inventory in the distributors' facility. Inbound pallets are robotically depalletized onto a mechanized conveyor sortation belt and ultimately routed to each store's shipping door via an applied bar code that indicates store destination. Critical to this method is the availability of an Advanced Shipment Notification.

Adapted from www.komintl.com

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EXHIBIT IV

SEARS CONSOLIDATED INCOME STATEMENTS (1994-1998) (In $ million)

1998 1997 1996 1995 1994 OPERATING RESULTS Revenues $ 41,322 $ 41,296 $ 38,064 $ 34,895 $ 39,021 Costs and expenses 39,467 39,302 35,981 33,130 31,567 Operating income 1,855 1,994 2,089 1,705 1,454 Other income, net 28 144 30 27 31 Income before income taxes, minority interest and extraordinary items

1,883 2,138 2,113 1,732 1,485

Income taxes 766 912 834 703 614 Income from continuing operations 1,072 1,188 1,271 1,025 857

Income form discontinued operations –– –– –– 776 402

Extraordinary (loss) gain (24) –– –– –– 195 Net income 1,048 1,188 1,271 1,801 1,454 FINANCIAL POSITION Retained interest in transferred credit card receivables $ 4,294 $ 9,916 $ 2,260 $ 5,579 $ 3,549

Credit card receivables, net 17,972 19,849 19,303 14,527 14,658 Merchandise inventories 4,816 5,044 4,646 4,033 4,044 Property and equipment, net 6,380 6,414 5,878 5,077 4,259 Net assets of discontinued operations –– –– –– –– 7,231

Total assets 37,675 98,700 96,167 93,190 97,312 Short-term borrowings 4,624 5,208 3,599 5,940 6,190 Long-term debt 15,045 15,692 14,907 11,774 9,985 Total debt 19,669 20,840 18,440 17,129 16,175 Percent of debt to equity 324% 356% 379% 391% 459% Shareholder’s equity $ 6,066 $ 5,862 $ 4,945 $ 4,985 $ 10,801

Source: Sears Annual Report 1999. NOTES TO STATEMENTS • Operating results and financial position reflect 1995 dispositions of Allstate and Homart as discontinued

operations. • The percent of debt to equity is calculated using equity from continuing operations. • Stock prices have not been restated to reflect the Allstate distribution. • Certain prior year information has been reclassified to conform to current year presentation.