Executive Briefings

Sears, Roebuck & Co.

William Gus Pagonis VP of Logistics-Sears, Roebuck

William (Gus) Pagonis has served as vice president of logistics for Sears, Roebuck & Co. since November 1993. He oversees all of the company's logistics functions, including vendor relations, transportation, storage, distribution, international logistics, home delivery and information systems. He also is president of Sears Logistics Services Inc., a wholly owned Sears subsidiary. The Sears logistics chain processes more than 500 million pieces of merchandise for some 2,500 stores, along with 4 million large products delivered to homes each year.
Pagonis first made his mark in logistics in the U.S. military. He served in the Army for 29 years, retiring with the three-star rank of lieutenant general. He was logistics commander during the 1991 war in the Persian Gulf, acting as single point of contact for all logistics functions during that conflict.


Q.What do you view as your great challenge in the year ahead, with respect to logistics and the supply chain?
A. The blue-collar workforce. I can stay up with the technology. I can stay up with the productivity needed in my distribution center, through imaginative ways to speed up the flow, or ensure that product is arriving at the right place and the right time. I can definitely work the inventory. The one thing that's going to be my Achilles' heel for the next several years - and that of many retailers, or anybody in logistics - is the blue-collar workforce. They are the people who are going to work in the distribution centers, and make the home deliveries of our appliances to the customer. As you know, the unemployment rate across the United States is the lowest it's ever been in history. Consequently, people are encouraging their children to go to colleges and junior colleges, and it's getting very difficult to find the hardcore blue-collar workforce which has been a predominately abundant commodity in the United States.

Q.. When you find them, is it difficult to train them?
A. I spent a lot of time in the military, so training is very important to me. I spend 40 percent of my time just in training right now with my vice presidents and everybody else. Consequently, all my people concentrate on training. The problem is, I am going after housewives who don't want to work 40 hours a week. Women want to be home when their children go to school, and when they get home. So we've got to figure out how to set up our distribution centers to accommodate the person who would rather work 20 hours instead of 40. In addition to that, I provide free transportation. I run bus service from small towns into my distribution centers. That's very important to a family that has to have two cars. I give college courses - I have a facility out on the West Coast, through Bakersfield College, where we actually take the kids off the floor and let them attend courses by satellite, and we bring in professors so many times a month. We're going to have our first four-year graduates this year - two of them. We've had about 12 get associate degrees. Those are the kind of things I have to do when I do find the workforce.

Q. Have you had success in this area?
A. We've had tremendous success. Now I'm hoping to take it to another level. I'm looking to find colleges near my other distribution facilities so that I can set up the same type of program. I have facilities across the whole United States. What I'm going to do is roll out some of these programs that have been very successful to other parts of my organization.

Q. How do you balance the need for improving customer service with that of cutting costs and minimizing inventory, while satisfying the expectations of Wall Street?
A. First of all, my mission is to provide tailored logistics, while keeping in mind that I have to balance service and cost. That's the order I put it in. Service meaning customer service. Cost meaning keeping the logistical cost as low as possible. One way I balance it is through incentives based on service and cost. I 'incent' people to be customer-oriented, and to keep their costs down. That's a unique balance that we try to achieve, because the most critical thing you have is servicing the customer. If you're not careful in logistics, you will cut your costs to the point where you're also cutting your service.

With regard to Wall Street's expectations of bottom-line, short-term profits, that's the bottom line of logistics as well. If you can keep the goods flowing to the retail stores in a proper service-and-cost balance, it allows the retailer selling the goods to have a very effective gross margin, which is reflected in the revenue generated in that income. So there's a direct correlation to service and cost tying into Wall Street.

Q. Do you believe that boardrooms understand that logistics today is a profit center and an area of competitive advantage, and not just a cost center?
A. I don't think so. I don't go out preaching this to a lot of people, but I think that logistics is the last frontier. Take the internet. No one's making money on the internet because they haven't figured out how to handle the logistics, service and cost portion, which allows them to lower the cost and still provide a service. And that's why these internet companies are having a very hard time meeting their logistical cost, which has a direct relationship to whether they're profitable or not.

Q.. Logistics must cut across silos, and work well with all aspects of an organization. Where are the weak links in this process today?
A. The first one is not assigning a single point of contact for logistics. The supply chain has to be under one individual. If all aspects and functions of that supply chain are under a single contact, you'll have tremendous success. During the Gulf War, people talked about whether we went far enough, or carried to the end the needs of the war. But no one condemned the logistical effort. The main reason was that Gen. [Norman] Schwarzkopf made the decision that all logistical functions would be underneath one single point of contact. It turned out that that was me. I controlled the ships, the planes, the trucks, the food, the fuel, the water and the contracts. Every logistical function that occurred during the war came under a single point of contact. The same thing applies to corporate America. When I first came to Sears, my logistical functions were under about five different executives. The first thing we did was have everything placed under one individual. I think that's where America's going to be headed.

Q. The talk today is about the need for collaboration with external partners - suppliers at one end of the chain, customers at the other. What in your opinion is the progress of true collaboration in the supply chain?
A. We move 600,000-plus truckloads, and I don't own one truck. I have partnerships with all the major carriers. I have certain distribution centers that I run with my own people, and I don't want to share that expertise with others. I have other distribution centers that I run with third parties, because it's something that I don't want to get involved in. The logistics of the future will be a combination of internal functions and contracting out to third parties. The proper blend will be different for each part of America. It'll be tailored, and I'm a great believer in that.

Q. What about information? Is it flowing smoothly among all the channel partners, creating true efficiency and good customer service?
A. We are now at a point where there's too much information flowing. I'm on a new kick here - with the internet and web sites and the connectivity you have in IT, if you have the proper communications flow set-up, it should work very well. The dilemma is the flow of too much information; some of it shouldn't be flowing at all. The trick is, number one, to have information flowing up and down and sideways, and secondly, restricting the amount of information that's flowing to just that which is needed. Otherwise, people get inundated, and they don't read anything.

Q. What about the flow of crucial point-of-sale data that can either eliminate or greatly reduce inventory, and lead to lean manufacturing and inventory strategies? Is that type of information flowing smoothly?
A. Yes and no. I'd say that's a tremendous area for improvement. "Flow, don't store" is a big catchall that people use, but you've got to have inventory someplace. In the retail business, you've got to have it where you can get it to the store. Because when customers come in, if a product's not on the shelf, they just have a go a few more steps to another store to get it. So the key to success is getting the inventory pockets in the right place, and then allowing your point of sale to integrate with that so that the replenishment of those goods can be done on a routine basis. There's a lot of work that has to be done there. It's very easy on a piece of paper to lay this out. And very difficult to execute it at the proper level needed for success.
Q. Where are you right now, in terms of being able to measure your performance with just the right amount of metrics?
A. First of all, one of my strengths of coming from the military is we measure everything. Here at Sears, I feel very comfortable that I know the exact cost of removing a product from our distribution center to the customer, regardless of the category of product - whether it is appliances or dresses. We have the measurements in place. I feel very comfortable that when I talk to the CEO and tell him the cost of something, it's fully burdened and I'm not hiding anything.

I can't answer your question for other retailers or people in the United States. But measurements are excellent if they're used properly, and if they are fully allocated and fully burdened. Logisticians have a habit of averaging. When you average, you say you're on time 99 percent of the time, and that's wonderful. But if in one place you're on time only 40 percent of the time, and in another place 100 percent, it doesn't help that 40 percent. And if volumes are high enough, the 40 percent gets hit. So I'm a great believer in not averaging, in having actual measurements, activity-based cost accounting, and that's what we try to do at Sears.

Q. Are there any lessons that you learned in the military that were not applicable to the commercial environment?
A. I get asked that question by a lot of people. It's a very simple answer: Every technique I used in the military in logistics and leadership I am using at Sears. The difference, which gives the civilian world a little bit of an edge, is, number one, the low turnover rate. In the military, it is astronomical. People are going to schools, they're going overseas, they're going here and there. When I was in the Gulf War, I had at least four sets of commanders underneath me in the 18 months I was there. In the civilian world, I have one set. Which means if you have the proper training programs set up, and you have a lower turnover rate, your accomplishments can be a lot better, and you can move it further down the chain of command. That's one thing I've enjoyed very much.

However, you've got to guard against complacency. I haven't lost very many people since I've been here. I've only lost two vice presidents - one retired, and one went off to bigger and better things. And that's out of 14 vice presidents. So I've had the same team for seven years. All the time I spent training and motivating pays off, because they're there! Whereas in the military, as soon as I trained somebody, they were gone. Secondly, nobody's shooting at me, so it's a lot easier here. And finally, you only have a board of directors of eight or 12 people, and you have a CEO. In the military, the board of directors is 500-plus - the Congress. When I put a plan together here, it's good for the year. A plan in the military had to go through so many different scrutinizations and cuts, it was a nightmare. (Not in the Gulf War, but in the rest of my career.)

But you know what the key to success is, the common link between the military and the civilian world? People. Nothing moves unless a person picks up a box and puts it on a forklift. Nothing is sold in the store unless somebody helps the customer. In the military, nothing happens unless the guy with the rifle goes in there and destroys the enemy. That's probably the one thing people are missing in the civilian world. Everybody says how important their people are, but not a lot of companies put any emphasis behind it.

Q. What is Sears's strategy for competing in e-tailing and the internet, and has it required any different approaches to the way you manage logistics in your organization?
A. First of all, we had tremendous success in appliances. We put all our appliances on the internet overnight, and there wasn't any impact on logistics at all. In fact, when a person buys from their home on a computer, it's just like they're going to the store at point of sale. I didn't have to increase my inventory or my people - it's just profit. So the appliance part was very easy and successful.

On the tools and lawn and garden, which we launched earlier this year, we're using the brick and mortar we presently have and we're doing very well. We're getting all kinds of hits and we're getting the product delivered to the customer. So for us, the secret of our success on the internet is the fact that we are using our brick and mortar to our advantage. Some of these companies have started on the internet as virtual companies, thinking that they were going to go directly to vendors and have the vendors ship. That doesn't completely work. Our biggest competitive advantage on the internet is the fact that you can take a product back to any of our 820 Sears retail stores.

Q. Are brick-and-mortar operations in a better position to compete than pure internet e-tailers?
A. You can talk about virtual this, virtual that. Eventually, you've got to have brick and mortar someplace, because you've got to have the inventory readily available and be able to ship it to the customer. What's happened is, those retailers that have a brick-and-mortar structure are receiving a tremendous advantage from that.

Q. On the internet, do you have an available-to-promise capability that truly tells whether you have something in stock?
A. We try not to advertise stuff that we know we're out of. So we don't end up being like the catalogs, where you buy 10 things and they send you six, along with a little card that says they're out of stock on the other four and that they'll come later. The online business has done a great job of making sure that we don't sell stuff that we can't deliver.

William (Gus) Pagonis has served as vice president of logistics for Sears, Roebuck & Co. since November 1993. He oversees all of the company's logistics functions, including vendor relations, transportation, storage, distribution, international logistics, home delivery and information systems. He also is president of Sears Logistics Services Inc., a wholly owned Sears subsidiary. The Sears logistics chain processes more than 500 million pieces of merchandise for some 2,500 stores, along with 4 million large products delivered to homes each year.
Pagonis first made his mark in logistics in the U.S. military. He served in the Army for 29 years, retiring with the three-star rank of lieutenant general. He was logistics commander during the 1991 war in the Persian Gulf, acting as single point of contact for all logistics functions during that conflict.


Q.What do you view as your great challenge in the year ahead, with respect to logistics and the supply chain?
A. The blue-collar workforce. I can stay up with the technology. I can stay up with the productivity needed in my distribution center, through imaginative ways to speed up the flow, or ensure that product is arriving at the right place and the right time. I can definitely work the inventory. The one thing that's going to be my Achilles' heel for the next several years - and that of many retailers, or anybody in logistics - is the blue-collar workforce. They are the people who are going to work in the distribution centers, and make the home deliveries of our appliances to the customer. As you know, the unemployment rate across the United States is the lowest it's ever been in history. Consequently, people are encouraging their children to go to colleges and junior colleges, and it's getting very difficult to find the hardcore blue-collar workforce which has been a predominately abundant commodity in the United States.

Q.. When you find them, is it difficult to train them?
A. I spent a lot of time in the military, so training is very important to me. I spend 40 percent of my time just in training right now with my vice presidents and everybody else. Consequently, all my people concentrate on training. The problem is, I am going after housewives who don't want to work 40 hours a week. Women want to be home when their children go to school, and when they get home. So we've got to figure out how to set up our distribution centers to accommodate the person who would rather work 20 hours instead of 40. In addition to that, I provide free transportation. I run bus service from small towns into my distribution centers. That's very important to a family that has to have two cars. I give college courses - I have a facility out on the West Coast, through Bakersfield College, where we actually take the kids off the floor and let them attend courses by satellite, and we bring in professors so many times a month. We're going to have our first four-year graduates this year - two of them. We've had about 12 get associate degrees. Those are the kind of things I have to do when I do find the workforce.

Q. Have you had success in this area?
A. We've had tremendous success. Now I'm hoping to take it to another level. I'm looking to find colleges near my other distribution facilities so that I can set up the same type of program. I have facilities across the whole United States. What I'm going to do is roll out some of these programs that have been very successful to other parts of my organization.

Q. How do you balance the need for improving customer service with that of cutting costs and minimizing inventory, while satisfying the expectations of Wall Street?
A. First of all, my mission is to provide tailored logistics, while keeping in mind that I have to balance service and cost. That's the order I put it in. Service meaning customer service. Cost meaning keeping the logistical cost as low as possible. One way I balance it is through incentives based on service and cost. I 'incent' people to be customer-oriented, and to keep their costs down. That's a unique balance that we try to achieve, because the most critical thing you have is servicing the customer. If you're not careful in logistics, you will cut your costs to the point where you're also cutting your service.

With regard to Wall Street's expectations of bottom-line, short-term profits, that's the bottom line of logistics as well. If you can keep the goods flowing to the retail stores in a proper service-and-cost balance, it allows the retailer selling the goods to have a very effective gross margin, which is reflected in the revenue generated in that income. So there's a direct correlation to service and cost tying into Wall Street.

Q. Do you believe that boardrooms understand that logistics today is a profit center and an area of competitive advantage, and not just a cost center?
A. I don't think so. I don't go out preaching this to a lot of people, but I think that logistics is the last frontier. Take the internet. No one's making money on the internet because they haven't figured out how to handle the logistics, service and cost portion, which allows them to lower the cost and still provide a service. And that's why these internet companies are having a very hard time meeting their logistical cost, which has a direct relationship to whether they're profitable or not.

Q.. Logistics must cut across silos, and work well with all aspects of an organization. Where are the weak links in this process today?
A. The first one is not assigning a single point of contact for logistics. The supply chain has to be under one individual. If all aspects and functions of that supply chain are under a single contact, you'll have tremendous success. During the Gulf War, people talked about whether we went far enough, or carried to the end the needs of the war. But no one condemned the logistical effort. The main reason was that Gen. [Norman] Schwarzkopf made the decision that all logistical functions would be underneath one single point of contact. It turned out that that was me. I controlled the ships, the planes, the trucks, the food, the fuel, the water and the contracts. Every logistical function that occurred during the war came under a single point of contact. The same thing applies to corporate America. When I first came to Sears, my logistical functions were under about five different executives. The first thing we did was have everything placed under one individual. I think that's where America's going to be headed.

Q. The talk today is about the need for collaboration with external partners - suppliers at one end of the chain, customers at the other. What in your opinion is the progress of true collaboration in the supply chain?
A. We move 600,000-plus truckloads, and I don't own one truck. I have partnerships with all the major carriers. I have certain distribution centers that I run with my own people, and I don't want to share that expertise with others. I have other distribution centers that I run with third parties, because it's something that I don't want to get involved in. The logistics of the future will be a combination of internal functions and contracting out to third parties. The proper blend will be different for each part of America. It'll be tailored, and I'm a great believer in that.

Q. What about information? Is it flowing smoothly among all the channel partners, creating true efficiency and good customer service?
A. We are now at a point where there's too much information flowing. I'm on a new kick here - with the internet and web sites and the connectivity you have in IT, if you have the proper communications flow set-up, it should work very well. The dilemma is the flow of too much information; some of it shouldn't be flowing at all. The trick is, number one, to have information flowing up and down and sideways, and secondly, restricting the amount of information that's flowing to just that which is needed. Otherwise, people get inundated, and they don't read anything.

Q. What about the flow of crucial point-of-sale data that can either eliminate or greatly reduce inventory, and lead to lean manufacturing and inventory strategies? Is that type of information flowing smoothly?
A. Yes and no. I'd say that's a tremendous area for improvement. "Flow, don't store" is a big catchall that people use, but you've got to have inventory someplace. In the retail business, you've got to have it where you can get it to the store. Because when customers come in, if a product's not on the shelf, they just have a go a few more steps to another store to get it. So the key to success is getting the inventory pockets in the right place, and then allowing your point of sale to integrate with that so that the replenishment of those goods can be done on a routine basis. There's a lot of work that has to be done there. It's very easy on a piece of paper to lay this out. And very difficult to execute it at the proper level needed for success.
Q. Where are you right now, in terms of being able to measure your performance with just the right amount of metrics?
A. First of all, one of my strengths of coming from the military is we measure everything. Here at Sears, I feel very comfortable that I know the exact cost of removing a product from our distribution center to the customer, regardless of the category of product - whether it is appliances or dresses. We have the measurements in place. I feel very comfortable that when I talk to the CEO and tell him the cost of something, it's fully burdened and I'm not hiding anything.

I can't answer your question for other retailers or people in the United States. But measurements are excellent if they're used properly, and if they are fully allocated and fully burdened. Logisticians have a habit of averaging. When you average, you say you're on time 99 percent of the time, and that's wonderful. But if in one place you're on time only 40 percent of the time, and in another place 100 percent, it doesn't help that 40 percent. And if volumes are high enough, the 40 percent gets hit. So I'm a great believer in not averaging, in having actual measurements, activity-based cost accounting, and that's what we try to do at Sears.

Q. Are there any lessons that you learned in the military that were not applicable to the commercial environment?
A. I get asked that question by a lot of people. It's a very simple answer: Every technique I used in the military in logistics and leadership I am using at Sears. The difference, which gives the civilian world a little bit of an edge, is, number one, the low turnover rate. In the military, it is astronomical. People are going to schools, they're going overseas, they're going here and there. When I was in the Gulf War, I had at least four sets of commanders underneath me in the 18 months I was there. In the civilian world, I have one set. Which means if you have the proper training programs set up, and you have a lower turnover rate, your accomplishments can be a lot better, and you can move it further down the chain of command. That's one thing I've enjoyed very much.

However, you've got to guard against complacency. I haven't lost very many people since I've been here. I've only lost two vice presidents - one retired, and one went off to bigger and better things. And that's out of 14 vice presidents. So I've had the same team for seven years. All the time I spent training and motivating pays off, because they're there! Whereas in the military, as soon as I trained somebody, they were gone. Secondly, nobody's shooting at me, so it's a lot easier here. And finally, you only have a board of directors of eight or 12 people, and you have a CEO. In the military, the board of directors is 500-plus - the Congress. When I put a plan together here, it's good for the year. A plan in the military had to go through so many different scrutinizations and cuts, it was a nightmare. (Not in the Gulf War, but in the rest of my career.)

But you know what the key to success is, the common link between the military and the civilian world? People. Nothing moves unless a person picks up a box and puts it on a forklift. Nothing is sold in the store unless somebody helps the customer. In the military, nothing happens unless the guy with the rifle goes in there and destroys the enemy. That's probably the one thing people are missing in the civilian world. Everybody says how important their people are, but not a lot of companies put any emphasis behind it.

Q. What is Sears's strategy for competing in e-tailing and the internet, and has it required any different approaches to the way you manage logistics in your organization?
A. First of all, we had tremendous success in appliances. We put all our appliances on the internet overnight, and there wasn't any impact on logistics at all. In fact, when a person buys from their home on a computer, it's just like they're going to the store at point of sale. I didn't have to increase my inventory or my people - it's just profit. So the appliance part was very easy and successful.

On the tools and lawn and garden, which we launched earlier this year, we're using the brick and mortar we presently have and we're doing very well. We're getting all kinds of hits and we're getting the product delivered to the customer. So for us, the secret of our success on the internet is the fact that we are using our brick and mortar to our advantage. Some of these companies have started on the internet as virtual companies, thinking that they were going to go directly to vendors and have the vendors ship. That doesn't completely work. Our biggest competitive advantage on the internet is the fact that you can take a product back to any of our 820 Sears retail stores.

Q. Are brick-and-mortar operations in a better position to compete than pure internet e-tailers?
A. You can talk about virtual this, virtual that. Eventually, you've got to have brick and mortar someplace, because you've got to have the inventory readily available and be able to ship it to the customer. What's happened is, those retailers that have a brick-and-mortar structure are receiving a tremendous advantage from that.

Q. On the internet, do you have an available-to-promise capability that truly tells whether you have something in stock?
A. We try not to advertise stuff that we know we're out of. So we don't end up being like the catalogs, where you buy 10 things and they send you six, along with a little card that says they're out of stock on the other four and that they'll come later. The online business has done a great job of making sure that we don't sell stuff that we can't deliver.