Kmart: SCM Gone Wrong

By the 530th day, the turnaround that Chuck Conaway announced on Aug. 10, 2000, was finished. On that day, Kmart filed for bankruptcy protection.

Now, Kmart CEO Conaway and newly named Kmart Chairman James Adamson will begin a new turnaround effort, washing the No. 3 discount retailer's balance sheet of unwanted leases and reducing its debt.

The self-imposed two-year deadline to revive the discount retailer's flagging fortunes hit a wall this week when Kmart filed for Chapter 11 bankruptcy protection. The 41-year-old Conaway turned over the position of Kmart chairman to Adamson, although he will continue to direct the company's reorganization as chief executive.

What brought down the former market leader?

Conaway had diagnosed Kmart's Achilles heel as its supply chain. In September, Kmart wrote off $130 million for supply chain hardware and software and another $65 million for replacing two distribution centers.

Part of its problem: Kmart was never able to demonstrate the operating benefits it gained by adopting software from i2 Technologies. Instead, it moved less product off its shelves in Christmas 2001 than it had 2000, while rivals such as Wal-Mart enjoyed hearty gains in retail volume.

i2's work to speed up Kmart's supply chain process appeared to stall, as Kmart's financial troubles grew. What's more, individuals close to the project say i2's software failed to deliver in areas such as "micro-merchandising," a practice intended to help the retailer deliver the right goods to stores based on local demand.

While i2 says it has multiple applications running live at Kmart, it only names one: an inbound transportation and sourcing software called FreightMetrix. Kmart, which has burned through five CIOs since 1994 and is currently without one, may be looking at getting help from Manugistics, a logistics software company that has had its own turbulent year.

To avoid supply-chain snafus like this, remember:

1. Keep a steady hand in place. Turnover (at the "C" level) can be fatal.
2. Don't rely too heavily on a relationship with one vendor.
3. Don't expect a software vendor to be expert in all aspects of your business.