SEARS CASE STUDY REBECCA S DILEMMA:

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1 REBECCA S DILEMMA: SEARS CASE STUDY Sears is about to launch a new heater when a seasoned engineer comes forward with major safety concerns. Senior management is pushing Rebecca, the Product Manager, to launch the heater on time as planned. What should she do? Team: Rohan Aggarwal, Heather Eisenman, Thea Mosher, Rachel Petersen, Alexandra Rodriguez- Vazquez Leading With Integrity: Professor Topping & Professor Gilkey FALL 2014

2 As she looked out the window on a rainy day, Rebecca Patterson was getting increasingly frustrated and uneasy. She was a product manager for Kenmore, Sears private label brand, and was responsible for the launch of a new heater line that her team had spent the last six months working on. She had just come from a meeting with her engineer, John Brown, and things were not looking good. John had revealed to her that he wasn t comfortable with the product testing he had conducted and wanted to delay the launch of one of the heaters. Sears was about to launch a new heater line under the Kenmore brand, the parts for which were being sourced from China. Sears had already been burnt on this before, by having to do a product recall on a different category from the previous year. This time the supplier was more reliable, but the testing standards, given Sears declining market share and thus Kenmore s declining sales were extremely lax. John s experience with designing products at his previous company led him to believe that Sears standards were not up to the mark and he had decided to do his own testing on the new prototypes that had just come in from China. One of the heaters had failed on all of them. Not only did the one heater not maintain the desired temperatures but the transformer caught fire in one of the tests. John told Rebecca about the issues and she was now in a tough spot. The launch was critical to Kenmore s plans for this year to achieve their financial targets and Rebecca had been strictly told by her manager that there was no room for delay. John had already been admonished for not following the guidelines and going on his own testing path. Yet he was a very competent engineer who had dealt with these issues before. Rebecca trusted his judgment. Now with the heaters catching fire in the latest round of testing, Rebecca was really skeptical about their safety and her conscience was not allowing her to sit still and not do anything about it. The launch was a highly visible initiative within the company with hopes that these new heaters would gain rapid market share due to their new dynamic design and new features. A timely launch would put her on the map in terms of her position in the company and would serve as a launch pad for her career. At the same time, failure to not launch in a timely fashion will put her in the limelight as the manager who failed. But what if something went wrong, and John was right? The last thing the company needed was a product recall and a slew of lawsuits on its hands. Her boss was about to be back from lunch and have a meeting with her about the launch strategy. With the launch just a couple of months away, tensions were running high and she was unsure of what to do. History of Sears Richard Sears founded the R.W. Sears Watch Company in 1886 in Minneapolis, Minnesota. Richard, a railway station agent, seized an opportunity to buy a shipment of gold watches and using the railroad was able to sell them for a nice profit. Thus began the company that would become his legacy. After moving the business to Chicago in 1891 and taking on a partner in 1893, Sears changed the name of the company to Sears, Roebuck and Co. recognizing an opportunity to expand beyond jewelry, Sears transformed the mail order company into a goods supplier for farmers in need of a cheaper alternative to expensive rural stores. In 1901, Sears, Roebuck and Co. went public, selling stock on the open market in order to generate capital. Business grew quickly, leading the company to expand its locations to other parts of the country. Innovative assembly-line time scheduling allowed them to provide top quality customer service 1 P a g e

3 while significantly increasing capacity within their plants. The company s focus on providing factual catalogs and quality merchandise set it apart from the competition. In 1911, it opened a laboratory from which scientists confirmed adherence to quality standards and conducted scientific comparisons between Sears and the competition. Sears quickly became known as the watchdog of the catalog for its perceived focus on quality. The first retail store opened in 1925 inside of the Chicago mail-order plant. By 1933, it had grown to 400 brick-and-mortar locations. Like their innovative assembly line, which revolutionized the way mail order companies did business, Sears establishment of a retail design in which buildings were designed around the retail displays revolutionized the industry. Sears was selling everything from appliances and clothing to car service and insurance, and they recognized the need for a custom store layout to match. Expansion went international in 1942, even as Sears continued to strengthen its domestic foothold. The company announced its success to the world with the opening of the world s tallest building, the Sears Tower, in downtown Chicago in Sears was thriving and the world now knew it. 1 Over the next few decades; however, Sears began to falter as it failed to keep up with the growing competition from new entrants like Wal-Mart and Target. The company failed to change with the market and over time became irrelevant to customers, falling from the top retailer to the brink of extinction. In 2005, Eddie Lampert, hedge fund guru and owner of Kmart, merged the two companies in an effort to revive them both. In 2009, Lampert decided to run the company like a hedge fund portfolio, breaking Sears into 33 business units and analyzing each of them like separate companies with business units at war with each other fighting for marketing assets. Despite his claims to the contrary, Lampert s strategy exacerbated the collapse, with Sears losing $9.2 billion in sales since the introduction of the program. 2 Kenmore Kenmore is a private label brand of household appliances sold exclusively at Sears. Originally, Kenmore products used to include everything from electric blankets to baby bottle sterilizers. Current product lines consist of either major household appliances such as refrigerators and dishwashers or minor appliances such as dehumidifiers, vacuums, or microwaves. One in three households owns a major Kenmore appliance and it is the third largest appliance brand in the United States after GE and Whirlpool. The brand generates over half of the revenue for the Home Appliance business unit which is the most profitable business unit within Sears. In 2002, the brand celebrated its 75 th year anniversary and grew to become the flagship line within Sears. It currently has more Consumer Reports ratings than any other appliance brand and has differentiated itself through new features and innovation and consistently delivering exceptional performance. Sears private label brands became critical to the future success of the company and eventually became their own business unit called KCD which stood for Kenmore, Craftsman, Diehard. This business unit oversaw all product launches under these brands Sears Profile. Hoovers. 2 P a g e

4 Space Heater Industry A space heater is a device for heating an enclosed small area versus central heating, which warms a larger space at once. These permanently installed space heaters may use electricity, burn natural gas, use propane, or use fuel oil or wood pellets to generate heat. Since portable heaters use electricity these can be a great and safe alternative to gas heating as this can be very dangerous if there is no proper ventilation for carbon monoxide poisoning to occur. Space heaters can be divided into those that transfer their heat primarily by convection or those that transfer hear by radiation. One type of convective heater is the fan heater, such as the Kenmore heater. These may work by having an oil heater warm up slowly through wire-element heaters that are assisted by a fan. The fan then allows the heater to reach an optimal operating temperature more quickly. However, the drawback to these fan heaters is that these may overheat and can create a fire hazard. One type of radiative heater is a Halogen heater. These are usually comprised of tungsten filaments with heat-resistant quartzes and operate much like halogen light-bulbs, but energy is primarily in the infrared spectrum. These convert up to 86% of their input power to radiant energy and the rest is lost to conductive and convective heat. 3 The advantage of halogen heaters is that the radiation created can be directly absorbed by clothing and skin, without having to heat the air in the space making them very efficient for heating poorly-insulated rooms. There are two primary health risks from heaters; fires and carbon monoxide poisoning. The latter may be caused by gas and kerosene heaters while fires can be caused by electric heaters. Fire may also result from switches that cut power if the device is tipped over, such as those found in halogen heaters. Within the United States, Underwriters Laboratories (UL) maintains standards UL 1278 across portable electric space heaters, and UL 1042 for portable and fixed baseboard electric heaters. 4 Space Heaters are a subset of the Household Appliance Manufacturing Industry. Companies within this industry manufacture large appliances, such as stoves, ovens, refrigerators, and washers and dryer. They also manufacture small appliances, including vacuum cleaners, fans, humidifiers and dehumidifiers, and space heaters. Some of the major names include US-based GE and Whirlpool, along with BSH Bosch (Germany), Electrolux (Sweden), Haier (China), and LG Electronics (South Korea). The US household appliance manufacturing industry consists of about 300 companies and the combined annual revenue is around $18 billion. 5 These manufacturers sell appliances to both appliance distributors and to large retailers. Distributors then sell to small retailers, homebuilders, property managers, and remodelers. Larger retailers such as Sears and Home Depot, account for a bigger percentage of a manufacturer's sales. These retail stores also tend to only carry a limited number of appliance brands names. 6 3 Household Appliance Manufacturing Industry. Hoovers. 4 Underwriters Laboratories. 5 Household Appliance Manufacturing Industry. Hoovers. 6 Household Appliances- Space Heaters. Consumer Reports. 3 P a g e

5 Holmes Holmes spaces heater is owned by Jarden Corporation who also owns Sunbeam, Patton, Coleman, and Bionaire subrands, and has av40 percent market share of the U.S. space-heater market. Jarden manufactures convection and radiant heater products, and its main types are quartz and ceramic heaters. The products are widely distributed at Walmart, Target, Home Depot, and regional appliance dealers and the prices range anywhere from $20 to $70. 7 Honeywell Honeywell is part of the Helen of Troy (HOT) group of products. This firm makes many different small appliance products including hair dryers. The company was able to enter the housewares market with its OXO International purchase. Honeywell brand space heaters are primarily ceramic type with a fan. These products are sold at Walmart, Target, and Best Buy and prices can range from $25 to $80. 8 Lasko Lasko Products makes household items that include indoor and outdoor electric fans, humidifiers, space heaters, utility boxes, and even Christmas tree stands. It s a top portable fan maker that operates several manufacturing plants in the US and distributes its products internationally. The company's primary type of space heater is ceramic with a fan. These heaters are mainly sold at the Home Depot, Target, Lowe's, and Walmart and the prices range from $20 to $ DeLonghi The company makes and markets a variety of home appliances, including air conditioners, heaters, humidifiers, blenders, espresso makers, toasters, vacuums, and irons. DeLonghi is based out of Italy and operates in about 50 countries through its two divisions: Household and Professional. DeLonghi sells mostly convection heaters within the ceramic category. These products are sold at Sears, Target, Best Buy, Amazon, and many other online retailers and the prices range from $30 to $ Pelonis Pelonis is part of Midea Group, a global appliance manufacturer offering many types of heaters. These heaters are sold at hardware stores such as True Value and Ace, through online retailers, and at specialty stores and regional appliance dealers ranging in price from $15 to $ The Dilemma As of April 2013, Rebecca was the new Product Manager for Kenmore Home Environment. Product managers were responsible for working with suppliers to launch new products within existing P a g e

6 categories as well as finding new categories that would fit under the Kenmore umbrella. Each product manager was supported by a team consisting of multiple engineers, industrial designers, and a packaging expert. Each team member was required to sign-off on product launches in addition to the product manager who was the final sign-off needed for production. Home Environment was a new category within Kenmore and consisted of six product lines including space heaters. This category was an important initiative for the Brand Business unit because it was entering several product lines Kenmore had never played in before. Increasing sales and market share over the next few years was critical to a successful entrance into these new product lines. Rollins Heater Recall The 2013 line of Kenmore space heaters was launched in stores on September 16, Three weeks later Rebecca received her first customer complaint about the opening price point (OPP) heater that retailed for $ This item was manufactured by Rollins, a large Chinese manufacturer with multiple facilities in Asia. Rollins was manufacturing five of the items in the Kenmore heater line and this was the first year they had won business from Sears. By the end of the week, Rebecca had received 3 more customer complaints all stating the heater had started smoking within 15 minutes of turning it on. One customer had even been burned when she attempted to unplug the item. Rebecca immediately put a stop sale on the item, preventing all Sears and Kmart stores from selling any units. After two months of investigation without any assistance or cooperation from the supplier, Rebecca s engineers determined the problem was due to Rollins using a lower-grade of plastic during production than what was originally agreed to and tested. As a result, thousands of units were recalled and shipped to a third party to be destroyed. Rollins paid over a million dollars for the defective units and Sears terminated doing business with them Heater Line With the termination of Rollins, Rebecca had to find a new supplier to produce the heater line for the following year. After months of negotiating, a supplier called Boward Co. ended up being awarded 80% of the products within the heater line with two other suppliers making specialty units. Boward Co. was a home products company that made over 13,000 items for 25 different categories. Their main headquarters was based in the US and they had been doing business with Sears for several years by supplying merchandise under their own brand Comfy Tone in addition to making a few fans for Kenmore private-label. They were already familiar with Kenmore s testing requirements and their product development process. The 2014 heater line would be the largest amount of business with Kenmore they had ever been awarded and if the launch went smoothly their contract would be extended 3 years. One of the items Boward Co. was awarded was the OPP heater that Rollins previously manufactured. Boward Co. was able to produce an item that looked nearly identical to the Rollins heater. The only difference was the Boward Co. item was a few centimeters shorter and would be entirely white instead of a two-toned look. Being the lowest price point in the line-up, this unit represented the highest volume and was a big reason Kenmore was able to secure low costs across the line (see Exhibit 1). Engineering Tests 5 P a g e

7 All of the items in the line-up passed the first four stages of the product development process without any problems. For the final stage, the vendors were required to send two pre-production samples of each item for the engineers to do a final test. At this point in the process, the heaters had passed 90% of the industry s required testing by a third party and this final testing by the Kenmore engineers acted as a last-minute gut check. John Brown, the lead engineer on the heater line, tested both samples of the OPP heater and found one of them started smoking before immediately shutting off. John decided to perform further testing. He was new to Sears and felt that Kenmore s product testing did not have strict requirements. As suspected, the item failed several of the additional tests. He sent Boward Co. pictures from the failed tests and called them to discuss. Boward Co. assured John that the item sent over was a fluke and preproduction samples often have errors since they are handmade. The heater was designed to shut-off in the event it overheats. Furthermore, they made a similar item for Walmart last year and didn t have any customer complaints. They would be happy to send over additional samples for further testing. After contemplating how to build his case, John presented Rebecca with the facts. Despite Boward Co. s attempts to reassure him, he strongly recommended that the OPP heater should not be launched with the rest of the line. He believed the Rollins recall had been partially due to the poor construction of the heater and this heater by Boward Co. was similarly built. Even if the heater passed all of the regulated testing, this product had failed the extra testing he personally performed. Furthermore, he argued that another recall to the heater category could be detrimental to the Kenmore brand and that a brand that stands for performance should not be launching products with such low price points in the first place. The Launch Decision Rebecca contemplated over whether or not to approve the launch. John had made a solid case although some of his reasons were based on his opinions rather than facts. He didn t seem to understand the pressure she was under. Her boss had made it clear that it was more important than ever to hit her sales numbers given Sears poor performance. Moreover, Rebecca didn t know how Boward Co. would react to canceling the product with the highest volume. They might argue to increase the costs across the entire line. Rebecca would never launch a product that had potential safety issues but the heater had passed all of the third party testing. With all of these factors, she knew she had to stay objective while making this critical decision. Exhibit 1: 6 P a g e