Merging Disparate IT Systems and Exploiting Multichannels

Dealing with Multi-Channels

Companies that engage customers across many channels, earn trust and repeat business. In fact, there are some indications that multichannel customers spend even 50 percent or more during the holiday season than their traditional single-channel counterparts. For instance, Amazon.com is reportedly celebrating its best ever holiday season with record sales and bullish claims about the number of orders it was able to successfully fulfill. Yet, despite the affability of multichannels, except for a few groundbreaking companies, this is still uncharted territory.

Part Three of the Retailers Join Forces for a "Make or Break" Attempt Their Competitive Landscape series.

Better Web design and wider selections of products offered on-line are important to multichannel success; however it is crucial to understand that factors mitigating revenues and to ability to fulfill Web orders are also key. A good Web site design—one that has streamlined site navigation, search, and checkout processes—enables the kind of sales process that best fits the customer's and retailer's needs, as does good site performance, and a well-designed user interface. One will indeed never achieve proper order fulfillment without a self-evident navigational structure, the right search, help, linking of the site to the support center for synchronous user support, etc. Front-end business-to-customer (B2C) e-commerce success also requires good product information and pricing, because it is easy for Internet customers to comparison-shop. A $2 or so difference in the retail price of a DVD can have a large impact on sales volume when the competition is only one click away.

For a detailed discussion multi-channel sales see "Consumers Shop Everywhere: Understanding Multi-Channel Sales".

Once the retailer has designed its process to take advantage of the multi-channel sales opportunities, it must build a strong infrastructure that supports on-time delivery handles returns, instead of simply focusing on reducing costs. Multichannel retailers must be able to flawlessly execute a full range of services to engage, transact, and fulfill Web placed orders. Hence, most successful multichannel retailers of today had to either build a complete set o in-house or outsource some or all of them.

What's more, traditional brick and mortar retail stores still rely on store clerks and managers to support customers, while multichannel retailers must provide similar support via call centers that are adequately staffed so that customers are not on hold for too long. Additionally, these centers should be available around the clock. There should also be a number of appropriate financial services available, such as payment gateways, merchant accounts, fraud screening, and business payment services. For more information, see Differences in Complexity between B2C and B2B E-commerce.

Apart from Amazon as the Internet retailer pioneer, the likes of Best Buy, Staples, Ahold, Target, and Lowe's have also been carving out their niches. They are capturing growth and profits from multichannel, customer-centric marketing in a competitive market dominated by Wal-Mart's well-oiled retail machine. While Wal-Mart can match the growth of these retailers in absolute numbers just by opening new stores, it will hardly take more business in the competitive multichannel market serving customers with individual, personalized shopping experiences and by delivering on their complex requirements.

Dealing with Technology

Considering the use of technology for supply chain effectiveness and differentiation, new technology will be indispensable for Sears Holdings, which will be created when Kmart Holding Corporation (NASDAQ:KMRT) and Sears, Roebuck and Co. (NASDAQ:S) complete their merger. Yet, so far, neither merging party has been a dominant force in any retail segment and neither are they known for their respective IT or supply chain management (SCM) proficiency. They have only had sporadic investments in some applications with less than limited success (to put it mildly). An astute IT strategy should help any company develop a strong competitive advantage whether it be improved time-to-market, better insights about customers behavior and preferences, or devising a more efficient supply chain.

But, with the impending merger, the two giants will likely be preoccupied with rationalizing their numerous diverse IT assets, decommissioning redundant ones, and integrating the rest without losing crucial sales and inventory data, that there will be little time and resources to pursue anything else. Already lagging behind the competition technology-wise, it is difficult for us to see how Sears Holding will not fall further behind, let alone overtake the competition.

One should also bear in mind that poorly leveraged technology had been a major reason for Kmart's bankruptcy. Since the 1980s, Kmart seemed fall into complacency. It failed to stick to the traditional tenets of business—impressive customer service, constant innovation that keeps customers' attention, and cost savings. Moreover, while Kmart attempted to harness technology to address supply chain efficiency, it did not follow through to get value out of its solutions. For example, in mid 2000, Kmart deployed a number of SCM products including i2 Technologies and former EXE Technologies (now part of SSA Global), to launch an ambitious renovation attempt worth $1.4 billion (USD) of software to improve its supply chain systems. It aim to reduce store-level out-of-stocks and to increase inventory turns (see i2 Will Come Out Ahead in Kmart Deal). Unfortunately, Kmart had seemingly fallen prey to the misperception that packaged applications, in plain "vanilla mode," and without significant modification could run a complex organization of its size. The project had all but stalled. A year and a half later, before the systems ever went live, the company announced that it was abandoning most of its software and was instead buying a warehouse management system (WMS) worth $600 million (USD) from Manhattan Associates. This too apparently failed to solve the company's supply chain problems, and it went into bankruptcy in early 2002.

Yet, a significant software investment is necessary to effectively meet the needs of multichannel shoppers. Once can hardly imagine the success of Amazon.com without a significant application investment. Complex organizations need a level of applications customization. Given the potential of multichannels, the need for technology and of all these factors, Sears Holding must become more technically daring and innovative as it strives for a possible differentiation. Unlike the chaotic moves Kmart undertook a few years ago, at the same time the company was faltering, Sears must view IT as the enabler for business success, not the "be all, end all". A mitigating factor to Kmart's faulty forays may very well be that Sears seems to be more innovative and aggressive when it comes to leveraging technology to achieve operational efficiency.

Indeed, behind many success stories in American business lies an innovation. Going back a century, in the case of Sears, the innovation was the mail order catalog. At the time the company began in the late nineteenth century, rural general stores were ripping customers off by often charging 100 percent mark-ups on goods. Rural customers eventually rebelled by spending their dollars with mail-order pioneers, especially with Sears, whose model supported cheaper prices and higher volumes than the rural stores. Further, the system was backed by an ever-improving postal service. When Sears' catalog sales were at their peak, customers often ordered from the catalog over the telephone and picked up the goods at the nearest store. Since its introduction a few decades ago, the catalog pick-up area has always been very busy.

Fast forward to the 1990s. Sears did not sell anything on-line until 1997, and until 1999, it offered only one product category. From the beginning of the Internet revolution, Sears' strategy was to maintain at least one face to the customer. It wanted to ensure there were no rifts between "on-line" and "off-line" Sears. Today, products bought on-line can be picked up and returned to the stores, if necessary. Customers can also schedule in-store service visits on-line. Sears also provides near real-time inventory visibility across all stores.

One of the ways in which Sears has been able to achieve its goal of a single channel for multichannel customers and of automating supplier relationships has been to pay paramount attention to product data quality. The goal, in this regard, is to concentrate data in one location as one repository for all product information, which drives the financial, logistics, and legacy systems. Sears reportedly has one vendor master file that holds payment terms, contact information, electronic data interchange (EDI) routing and setup information, insurance requirements, and so on. In the field of product information management (PIM), Sears has worked closely with QRS, a company that was recently acquired by Inovis and that addresses the problem of global data synchronization (GDS) between retailers and suppliers (see Inovis Delves into PIM by Snatching QRS).

Accurate product descriptions, specifications, pictures, etc., should give consumers and business partners more confidence that they will receive exactly what they want. Consequently, product categories beyond traditional books, CDs, DVDs or games are becoming more popular for multichannel retailing. QRS, which keeps a file of 90 million universal product codes (UPC), is the bridge between disparate product information protocols used by suppliers and the single repository Sears prefers. For more information, see The Role of PIM and PLM in the Product Information Supply Chain: Where is Your Link?.

Sears has also been more aggressive then Kmart in pursuing other new IT initiatives during the past two years. In 2003, it orchestrated a ten year, $1.6 billion (USD) IT outsourcing deal with Computer Sciences Corporation (CSC), and it also signed a licensing deal with JDA Software and Manugistics for a more integrated set of tools to assist with merchandise management, in store systems, replenishment, merchandise planning, markdown price optimization, and planning and forecasting.

Not surprisingly, the two merging retailers have accumulated an abundance of different systems. At the store level, Kmart announced in 2001 that it was buying IBM SurePOS 700 cash registers for its point-of-sale (POS) operating system. Similarly, in 2004, Sears said that it planned to install newer SurePOS machines running 360Commerce's POS software on Microsoft Windows XP Embedded operating system. Still, a far greater challenge than merging these two POS systems will be with back-office applications at respective headquarters, including the merchandising, inventory planning, and SCM software. Each vendor has several different inventory management systems, logistics applications, or merchandize planning systems totaling nearly forty applications from vendors ranging from Caps Logistics (now part of SSA Global), via SPS Commerce to Retek (which was recently acquired by SAP), in addition to those previously mentioned.

In the case of Federated Department Stores (NYSE:FD) and The May Department Stores Company (NYSE:MAY) (although quite applicable to Kmart and Sears too), the success of the retail channel's transformation to a preferred destination for leading-edge yet affordable fashion apparel and household goods is fundamental for the long-term survival. To that end, the combined company must improve private-label sourcing and procurement operations by leveraging the latest planning and product lifecycle management (PLM) technologies to quickly bring new fashion brands to market in several weeks rather than in several months. Additionally, they too must be aware of technology. Currently, May Department stores can look up transactions, which is convenient for customers are returning goods without a receipt. Still, while impressive a few years ago, these capabilities have become a matter of course nowadays.

Conclusions and Recommendations

Time will only tell whether the respective management teams of Sears Holding, and Federation/May, will espouse a smart, coherent strategy, and better execution and whether their cultures will effectively blend to align their strategic goals. As with all mergers and acquisitions, their ultimate success will come down to proper planning and effective execution on all levels. However, considering the sizable cultural and legacy business process differences among these venerable retailers, it is easy for observers to be inclined to doom-saying.

Yet, success is not impossible as long as new management is ready to challenge the predictable retailing acumen and start building an integrated plan for the future. They need to strive for relevance rather than only wringing out inefficiencies or bolstering the balance sheet through real estate sales. The new management team should not miss the opportunity to combine traditional efficiency savings with thought-leading process improvements in critical retailing areas and smart investments in SCM and customer relationship management (CRM) technologies. These will drive a new level of differentiation and produce stronger competition, as well as better financial performance.

The current IT practices of recording sales, doing regular backups, keeping current virus definitions, and leveraging adequate analytical packages for decision-making are quickly becoming inadequate in the face of the competitions' capabilities. This is particularly true with the forthcoming, and futuristic-feeling retail technologies, such as self-checkout, "smart shelves and carts", in-store kiosks, customer personal digital assistants (PDA), analytics-based assisted selling applications, contact-less POS solutions, or various inventive payment options with digital signatures or authentications (see The Store of the Future). The result is that fewer customer service associates will be needed to meet customer needs. By doing this, the combined businesses may be able to cut costs while concurrently improving customers' satisfaction and their perception.

In the short term, new management should continue a focused approach for their respective customers and on profitability. They should further increase market awareness to become better-known names to their target markets and to be the retail destinations for the ever-choosy consumer. Yet, evaluating options for synergy in IT and in related business processes, while not slowing down justified enterprise application investments should be a key priority in post-merger operational planning. Again, time will indicate why management has hardly mentioned anything in this regard in their merger announcement. Perhaps they do not realize its importance, or maybe, more optimistically, they will inform the market only after their explore their options with more diligence.

On a more general note, retailers must start with an understanding of what will generate the most revenue and profit across multichannels. E-tailing Web sites must not be seen as totally independent of other channels—quite the contrary. Web storefront usability should be addressed first, but the focus on PIM, GDS, and cross-channel inventory visibility infrastructure should follow suit. It is all the matter of individual preference whether to engage in Internet shopping, and it is, however, certain that multi-channel retailers will attract new business on the condition they continue with good service, wide product and service selection, and reasonable price incentives.