Combined Sears-Kmart Faces I.T. Challenges

The blockbuster merger between Kmart Holding Corp. and Sears Roebuck and Co. will create the United States' third-largest retailer, with assets of $55 billion. But IT-savvy operations and a modern supply chain may be harder to come by.

Once Kmart's plan to buy Sears for $11 billion is approved, the combined company will operate as Sears Holdings, selling both Sears' appliances, tools, and Lands' End apparel, and Kmart's lines of apparel and home products. "We have about $40 billion combined cost of goods sold. We certainly see significant opportunities in merchandise and procurement synergies," said Alan Lacy, current chairman and CEO of Sears, at a news conference last week. The companies expect to save at least $300 million within three years, and in supply chain, IT, and administration, they also "see some opportunity there," Lacy says.

But whether all those opportunities can be realized is another thing, as neither company is known for IT or supply-chain finesse. Sears made only sporadic investments in supply-chain technology for the past couple of years, says Noha Tohamy, principal analyst of supply chains at Forrester Research, including its June purchase of software from Manugistics Group Inc. to better forecast demand and handle replenishment at stores and across all product categories. "They haven't made it more of a mantra like Wal-Mart has," Tohamy says.

Kmart's reputation is far worse. "Kmart has a history of buying IT supply-chain solutions and then not being able to follow through and get value out of those solutions," says Steve Banker, an analyst with ARC Advisory Group. The merger comes after Kmart spent two years clawing its way back from bankruptcy, and some attributed its troubles to its ineffective supply chain and antiquated IT systems. In the year leading up to its bankruptcy, Kmart spent millions of dollars on software from i2 Technologies Inc. and Manhattan Associates Inc. in an attempt to overhaul its supply-chain systems and processes, but the projects never quite got off the ground. Though i2 and Manhattan Associates still claim Kmart as a customer, neither company would elaborate on which products Kmart uses.

A Sears spokesman declined to comment on any impact the proposed merger may have on the two companies' IT organizations.

Before any supply-chain advances can get under way, the two companies have to take care of basic IT integration, Forrester's Tohamy says. "The bigger issue is they're going to have about 3,500 stores," she says. "It'll take upwards of 18 months to get their house in order in terms of IT." Major supply-chain enhancements probably won't happen for two years or more, she says. However, in the short term the two should be able to save money on logistics by consolidating shipments and leveraging volume deals with carriers.

But perhaps the biggest challenge will be instilling a culture that embraces IT. "They've got to have a cultural change," says Paula Rosenblum, director of retail research at Aberdeen Group. With this merger, "they get to choose if their IT department is going to be a help or a hindrance."