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Kmart/Sears Success Is in the IT

UPDATED: Kmart and Sears executives are busy planning one of the largest mergers in retail history.

And while there's a lot of talk of product mix, advertising message and store layouts, technology could determine whether the ballyhooed benefits of the $11 billion combination ever materialize.

The companies have different systems and applications, and combining them to efficiently support a 3,500-store chain will be a massive undertaking.

It's also one that Kmart and Sears have not been particularly good at in the past, John Fontanella, an analyst at the Yankee Group, told internetnews.com.

"Where I see the difficulty is in back-office and headquarters systems and merchandising, which is so critical in retail," Fontanella said, adding that neither company has been innovative in this area.

Merchandising systems help retailers determine what products to stock based on customers' demand, inventory and margins. To be effective, they must communicate with supply chain applications, which include transportation and logistics programs.

A Sears spokesman said it was premature to comment on the details of the integration.

For supply chain management, Kmart uses i2 Technologies and Sears runs Manugistics , which are neck-and-neck for market share among large retail chains.

"Inevitably, they'll have to pick one," Fontanella said. "[The supply chain] is the most logical place to start combining functions."

Combining supply chains and aggregating their purchasing power, the companies expect to save $300 million. An i2 spokeswoman said it was too early to speculate about how the integration might proceed. A Manugistics spokeswoman was not immediately available.

What of radio frequency identification , the most-talked about supply chain technology? RFID systems have two components: tags, which are thin, one-inch radio transponders attached to pallets, cases and eventually individual items; and readers, which are panels about the size of a pizza box that receive and translate signals and shuttle data back to a network.

Retailers believe RFID will replace bar codes, vastly improve the efficiency of their supply chain and reduce theft and loss.

Fontanella said the new Sears would be overreaching if it made RFID a priority, despite the fact that the retail giant it is seeking to topple, Wal-Mart, is charging ahead.

"I'd be a follower in that area," said Fontanella, noting that the news company will already be deluged with data. "I'd let Wal-Mart establish the RFID beachhead."

Since mergers of this size can be lumbering affairs, it's unrealistic to try and gauge the success or failure of IT integration any time soon. "I think it will take three years before we see if they are on the right track," Fontanella said.