Now In Bankruptcy, Kmart Struggled With Supply Chain

At a time when discount stores such as Kohl's, Target, and Wal-Mart are recording strong sales, Kmart Corp.--the granddaddy of them all--last week declared bankruptcy. Several factors contributed to the downfall, but one of the biggest is that Kmart didn't compete on price, a failure some attribute to its inability to master supply-chain technology and, consequently, benefit from supply-chain efficiencies.

As Wal-Mart moved away from a promotions-driven business model, which relies on special sales to bring customers into stores, to one that focuses on everyday low prices, Kmart stuck with the former approach, which results in sharp spikes and drops in demand for products, analysts say. Sale merchandise often was out of stock when customers got to the store. One reason for that is that it's hard to get supply-chain management software to work in that model without a lot of customization, and Kmart never built a supply-chain planning and execution system to effectively manage demand, says Eric Beder, an equity analyst at Ladenburg Thalmann who tracks Kmart. Over the years, some at Kmart saw the need for better software to manage demand, but Beder says top executives never executed on that vision.

Meanwhile, Wal-Mart built an E-business system to regularly communicate sales and inventory data from every store to thousands of suppliers and buyers, and deploy a private trading hub to consolidate its purchasing globally and bring suppliers online to bid on contracts--all part of a plan to lower costs and pass on savings. Promotions don't cause delivery problems for Wal-Mart because of its tight links with suppliers.

The contrast between the retailers' supply-chain systems has been evident in stores, says Gartner analyst Gale Daikoku, who worked in the retail industry. Wal-Mart has almost no supply storage areas because its vendor-managed inventory system makes suppliers responsible for delivering product when Wal-Mart needs it, she says. At Kmart stores, Daikoku says, it wasn't unusual for a supplier's sales representative, wanting to discover why something wasn't selling at a certain branch, to find shelves empty but products piled up in stockrooms.

Kmart has tried to change in the last 18 months. New packaged logistics and proprietary merchandising software helped the retailer improve its dismal record of getting holiday promotional shipments in on the date they're promised to customers. CEO Charles Conaway, who joined in June 2000, contracted with i2 Technologies Inc. that October for logistics-monitoring and transportation-management software, and a custom version of TradeMatrix supply-chain management software.

But the retailer never implemented TradeMatrix, says Steve Robinson, executive VP with i2 and liaison to Kmart. Shortly after signing the contract, Conaway concluded that Kmart needed to reengineer its business first to improve its dealings with suppliers.

Last fall, Conaway unveiled an IT project, based on Manhattan Associates' software and estimated at $600 million, to manage the flow of clothing, toys, auto parts, and other consumer goods into stores--nearly 500,000 items. In the process, he wrote off two distribution centers and IT assets, reportedly including some i2 supply-chain software and warehouse-management software from EXE Technologies Inc., worth $130 million. A Kmart spokesperson says the EXE software was so heavily modified that it cost too much to maintain.

Observers say management's historic inability to fully execute on innovative IT efforts may play a role in Kmart's rapid CIO turnover. Four CIOs have left or moved to other positions in the last five years; Kmart doesn't have a CIO now. "They blame failed IT projects on the CIO turnover or IT vendors, but executive management has never delivered," Daikoku says.

Despite Kmart's plan to restructure itself--making it easier to fix its supply chain by selling off as many as 250 unprofitable stores--it may be too late to take even small steps forward in the competitive space, Beder says. The bankruptcy judge won't let Kmart buy more software to deal with its problems while creditors are clamoring to be paid, and Target and Wal-Mart aren't going to sit idly by. Says Beder, "They're saying, 'This is more opportunity for us; let's go for it."

Photo by Matthew McDermott/Corbis Sygma