IT difficulties help take Kmart down

Long-standing IT woes played a contributing role in business problems that last week led Kmart Corp. to seek bankruptcy protection making it the largest retailer ever to do so.

Charles Conaway tried to reverse years of constrained IT spending after he became CEO in May 2000, announcing a two-year, US$1.4 billion investment that he said was the most money the company had spent on technology in a decade.

Yet, roughly a year and a half into the plan, Troy, Mich.-based Kmart now finds itself operating without a CIO, working to replace systems for which it took a US$195 million write-off in September and still trying to fix a troublesome supply chain system.

“They had a plan that was a big-bang kind of approach, replacing a lot of things in a short time frame,” said Steven Nevill, a consultant at Kurt Salmon Associates Inc. in Atlanta, which has worked on several Kmart projects. “I think they are going to be forced to look at replacing things incrementally over a longer time frame. . . . You have to go in with a surgeon’s knife rather than a bomb.”

Kmart last week announced that it had secured a US$2 billion financing package to fund its turnaround and continuing operations. Conaway also said the retailer intends to continue to invest in “critical technology, standardized information technology platforms, merchandising opportunities and supply chain enhancements” during its reorganization.

Kmart has experienced escalating difficulty in competing against Wal-Mart Stores Inc. and Target Corp., and it now faces significant business and technological challenges.

Kmart’s most recent IT instabilities began to surface in August, when the company announced that Randy Allen would exit her CIO post to become executive vice president of strategic initiatives and chief diversity officer. Less than a year before her reassignment, Allen left New York-based Deloitte & Touche Consulting to become Kmart’s fifth CIO since 1994.

Kmart has yet to hire a CIO to replace Allen, said spokeswoman Susan Dennis. Vice-presidents Karen Austin and Marc Congdon currently oversee IT operations, Dennis said.

Just a year ago, Kmart had touted Allen’s expertise in supply chain effectiveness, merchandising and logistics. So, not surprisingly, questions started to swirl after Kmart announced that it would take a US$195 million write-off with US$130 million due to the “impairment” of supply chain software and hardware that the retail chain would no longer use. The other US$65 million in charges related to the exit from outdated distribution centers, Kmart said.

Dennis said a portion of the write-off was for an extensively modified warehouse management system from Dallas-based Exe Technologies Inc. that Kmart had installed in 1997. The retail chain found that the system “was not doing the job we needed it to do to meet our business demands,” so it’s moving to a new warehouse-management system from Atlanta-based Manhattan Associates Inc., she said.

Peter Abell, an analyst at Boston-based AMR Research Inc., questioned that move, particularly given Kmart’s financial difficulties. Abell said many companies have found the Exe package to be very solid for consumer packaged, or hard-line, goods. Manhattan’s system, in contrast, is cited as an effective system for apparel, or soft goods, he said.

“To write off a whole lot of money doesn’t make a lot of sense to me,” Abell said. “There truly would be a business case to say, ‘Why can’t you live with both packages that do well with their respective goods?’ “

Kmart’s write-off has also fueled speculation about the discount retailer’s large investment in supply chain software from Dallas-based i2 Technologies Inc.

AMR analyst Greg Girard said his firm confirmed that part of Kmart’s technology writedown was related to some portion of its i2 investment. Neither Kmart nor i2 would comment.

Steve Robinson, i2’s executive vice president of product marketing, acknowledged that some i2 projects at Kmart have stalled. He said the retailer implemented two of i2’s transportation packages, Global Logistics Monitor and Freight Matrix, but it held back on other systems.

Robinson said a group running information systems had prioritized technology when Kmart purchased various i2 software applications in 2000. But in the first quarter of last year, a new management team came on board and decided to get back to business fundamentals ahead of the technology implementations, he said.

“I believe their plan was to re-engineer the business processes first and then come back with a technology implementation that would allow them to sustain the value,” Robinson said. He added that his understanding prior to the bankruptcy announcement was that Kmart intended to proceed with some i2 projects.

What the bankruptcy court will permit Kmart to do remains to be seen. Nevill said Kurt Salmon Associates worked with Edison Brothers Stores Inc. in St. Louis when it sought bankruptcy protection in 1999 and the court was hesitant to approve IT spending.

Nevill noted that the bankruptcy court has to protect creditors, adding that money spent on consulting or hardware depreciates quickly and that funds spent on software can lose their value completely, making it difficult to recoup if the business ultimately fails.

But it isn’t unprecedented for a bankruptcy court to look favorably on IT spending. Lindsay Parker, a consultant at Deloitte & Touche LLP, said that Cincinnati-based Federated Department Stores Inc., owner of Macy’s and Bloomingdale’s department stores, was able to convince the court that supply chain improvements were critical for the firm to emerge from bankruptcy, which it did in 1992.