Expansion of corporate inventory… Growing importance of ‘future strategy’

Samsung Electronics Hwaseong Campus Foundry. Source = Samsung Electronics

In the first half of the year, inventory assets of major companies are increasing rapidly. In response, opinions from a new perspective are emerging: “Inventory growth is a natural phenomenon, and the future strategy of companies is more important than immediate inventory adjustment.”

concerns of companies

According to the financial results of major companies in the first half of the year, inventories of most domestic manufacturing companies increased compared to the same period of the previous year.

Comparing the end of 2021 and the first half of 2022, Samsung Electronics’ inventory assets increased from 41.38 trillion won to 5292.2 billion won. During the same period, SK Hynix’s inventory increased from 8,616.6 billion won to 11,878.7 billion won, Hyundai Motor’s from 11.64 trillion won to 13.65 trillion won, and LG Chem’s from 8.28 trillion won to 11.23 trillion won.

Inventories are assets held by a company for the purpose of selling them on the market, assets being produced for sale, and raw materials or consumables used in production. Companies intentionally hold a certain level of inventory in case of fluctuations in supply and demand. Inventories by themselves have no positive or negative connotations. However, contrary to the company’s intention, the continuous increase in inventory, which has increased more than necessary, has a negative effect on the company’s performance.

In particular, as demand is slowing due to the recent economic slowdown and inflation, companies are struggling to reduce inventories. Failure to reduce inventories below an appropriate level may increase the burden of management costs on a company in the long run, which may deteriorate profitability.

Companies are responding to the situation by deliberately reducing inventories by adjusting their production capacity. Samsung Electronics lowered the utilization rate of its TV and video equipment production lines from 84.3% in the first quarter to 63.7% in the second quarter, and lowered the utilization rate of its smartphone production lines from 81.0% to 70.2% during the same period.

The utilization rate of LG Display’s Gumi production line was adjusted from 100% in the first quarter to 97% in the second quarter. SK hynix temporarily put on hold plans to expand its Cheongju plant in consideration of the increasing inventory of memory semiconductors, its flagship product.

LG Electronics Changwon Smart Park production process.  Source = LG Electronics
LG Electronics Changwon Smart Park production process. Source = LG Electronics

‘Future strategy’ more important than inventory adjustment

Some observers interpret the increase in inventory assets of companies as a natural flow. Considering the special circumstances such as the COVID-19 pandemic, global competition for hegemony, and supply chain turmoil, and the management paradigm shift in the post-corona period, production inventories ‘can never be reduced’.

Experts with such a view emphasized, “The future management strategy is more important than the immediate inventory adjustment.”

Currently, companies are required to change paradigm (structure) such as digital transformation in addition to traditional production capacity at the same time. According to the strategy, the role of traditional competencies in management may decrease. From this perspective, the increased inventory of companies is a natural phenomenon rather than a risk factor.

Professor Hwang Yong-sik of Sejong University’s School of Business said, “Currently, business leaders around the world are required to respond to changes in the management paradigm that will last for the next 20 to 30 years as their most important competency. It may be more efficient to expand the management weight of technological investment and new business development for the future rather than focusing excessively on adjusting production capacity in response, which is a more important issue, especially for high-tech companies.”

Professor Hwang continued, “The increase in inventory assets of major companies will present more homework for managers who need to prepare for the transitional period of global management. said

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