Inventory management of large Korean companies has reached a major turning point starting in 2024. According to an analysis of the inventories of 274 of the top 500 companies by sales, total inventories as of the end of 2023 were 179.5968 trillion won, a 0.3% increase from the previous year.

This change shows that domestic companies are making multifaceted efforts to improve the efficiency of their inventory management. In particular, the decrease in finished goods inventories is evidence that companies are becoming more responsive to market demand and at the same time suggesting that they are establishing more sophisticated production plans.

In fact, the failure of domestic conglomerates to manage their inventories is a major factor that hinders their profitability.

Inventory assets of the top 274 companies, which were 135.315 trillion won in 2021, surged to 179.459 trillion won in 2022. This sharp increase in inventory has been the main cause of the pressure on corporate working capital and deterioration of cash flow.

The automotive industry, in particular, has experienced a serious increase in inventory. Hyundai Motor's inventory assets at the end of 2023 were KRW 11,262.8 billion, up 31.1% from the previous year, and Kia also recorded a significant increase of KRW 8,341.9 billion.

This is a simple example of a failure to predict market demand and poor supply chain management. In this article, we will analyze why inventory management is important in modern business management through examples of major domestic and foreign companies' failures in inventory management.

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Inventory management case, analysis of the causes of failure by industry

Inventory valuation loss in the semiconductor industry

Inventory management in the semiconductor industry is an area that goes beyond simple volume control and involves sophisticated accounting strategies. The inventory management strategies of Samsung Electronics and SK Hynix show notable differences.

In the case of Samsung Electronics, inventory assets as of the end of the first quarter of 2024 were 36,751.4 billion won, a slight increase of 1.8% from the previous year, but SK Hynix's inventory assets decreased by 240 billion won (6.2%) to 3,621 billion won.

What is particularly noteworthy is the strategy of reversing inventory asset valuation losses.

Under the accounting principle known as the “low-cost method,” if the market value of inventory falls below the cost, the difference is treated as an expense and is reversed to profit when the market value rises again.

In the case of SK Hynix, the company improved its operating profit by 954.9 billion won in the first quarter of 2024 through a reversal, and Samsung Electronics is also estimated to have made a reversal of more than 1 trillion won.

While this accounting treatment may help improve profitability in the short term, in the long term, it is more important to improve the actual efficiency of inventory management.

In particular, the fact that Samsung Electronics' inventory asset valuation allowance balance is 5.5266 trillion won suggests that there is room for additional write-offs in the future, but at the same time, it also means that there is a risk of potential losses of that amount.

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Analysis of the conflicting inventory strategies of the automotive and petrochemical industries

The increase in inventories in the automotive industry is largely a strategic choice made in response to the reorganization of the global supply chain.

Hyundai Motor Company's inventory assets increased by 31.1% year-on-year to KRW 11.2628 trillion, which cannot be seen as a simple failure to manage inventory. This is a proactive response to global supply chain instability, and is interpreted as a buffer strategy for semiconductor supply and demand instability.

On the other hand, the petrochemical industry has taken a completely different approach. In the face of oversupply caused by new and expanded facilities in China, it has responded by actively reducing inventories through capacity control.

However, while a year-on-year inventory decrease of 9.1% may appear positive, it is difficult to see this as a long-term solution as it is the result of idling production facilities.

As a result, the inventory assets of the four petrochemical companies as of the first half of this year amounted to 7.3406 trillion won, an increase of 914.5 billion won from last year. This is the cumulative damage caused by poor sales that exceed the appropriate amount of inventory or when the balance between the amount of purchased raw and subsidiary materials and the amount of production is not balanced.

Inventory assets in the shipbuilding and machinery industries increased by 675.4 billion won (16.1%) from the previous year to 4,858.8 billion won. Although the difficult situation is similar, the inventory management strategies differ greatly by industry.

This suggests that a differentiated approach is needed according to the characteristics of each industry and market conditions.

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Inventory management issues in the food industry

Inventory management in the food industry is more complex due to the special nature of product shelf life. Ottogi's case shows this complexity well.

The fact that the ratio of inventory assets to total assets is 14.5%, which is higher than that of Nongshim (9.8%) and Samyang Foods (12.1%), cannot be simply attributed to inefficient inventory management.

What is noteworthy is the volatility of Ottogi's inventory assets. It showed a sharp rise in 2021 (13.2%), 2022 (17.8%), and 2023 (14.5%), which is mainly due to fluctuations in the size of unsent goods related to overseas raw material procurement.

In addition, the sharp increase in unsent goods from 41.4 billion won in 2021 to 187.2 billion won in 2022, followed by a decrease to 50.3 billion won in 2023, clearly shows the impact of global supply chain instability on food companies' inventory management.

Moreover, the fact that Ottogi's inventory asset turnover rate is 6.8 times lower than that of Nongshim (10.7 times) and Samyang Foods (8.4 times) is an inevitable aspect of operating a diverse product line.

However, the fact that CJ CheilJedang, a company in the same industry, maintains an inventory-to-total-asset ratio of 8.9% out of its total assets of 29,606.3 billion KRW suggests that there is room for improvement.

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Structural causes of inventory management failure as seen in the case analysis of inventory management

Structural problems in inventory management caused by global supply chain instability

Global supply chain instability is requiring fundamental changes to the inventory management systems of domestic companies. In particular, companies that are highly dependent on overseas procurement are facing structural problems that cannot be solved by simply adjusting inventory levels.

This problem is clearly evident in the food industry, such as Ottogi. The fact that unsalable goods, which were 41.4 billion won in 2021, jumped to 187.2 billion won in 2022 and then decreased to 50.3 billion won in 2023, shows that it was not just a failure in inventory management, but a serious impact on corporate operations due to uncertainties in the global supply chain.

Uncertainty in the global situation and the strengthening of protectionism are making it difficult for companies to secure stable raw materials. This uncertainty in the procurement of raw materials has led to a surge in sea freight rates and port congestion, making companies' inventory management costs unpredictable.

Moreover, this situation is increasing uncertainty about lead times across the supply chain, and as a result, companies are faced with the inevitable need to increase their safety stock levels.

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The threat of low-cost competition from China and technological catch-up

The growth of Chinese companies is causing domestic companies to face a double whammy. The results of the Korea Chamber of Commerce and Industry survey clearly show the severity of this crisis. Of particular concern is the impact of this trend on inventory management.

This concern is already manifesting itself in real damage. In the battery industry, 61.5% of companies responded that they were suffering real damage, and the textile and apparel (46.4%) and cosmetics (40.6%) industries are also being hit hard.

When Chinese companies supply similar products at lower prices, domestic companies are under pressure to lower their selling prices. This leads to a drop in the selling price of existing inventory, and companies concerned about deteriorating profitability are reluctant to sell aggressively. As a result, the inventory retention period lengthens, and inventory turnover deteriorates.

According to the survey, the main forms of damage suffered by domestic companies are ‘decline in selling price’ (52.4%) and ‘decline in domestic market transactions’ (46.2%). This shows that the market is being seriously encroached by Chinese products. A decline in market share leads to a gap between the previously set production volume and the actual sales volume, which in turn leads to a backlog of inventory.

The low-price offensive by Chinese companies is affecting not only the finished goods market but also the parts and materials market. This makes it more difficult for companies to determine the appropriate inventory level, exposing them to the risk of overstocking to prepare for uncertainty or, conversely, losing opportunities due to understocking.

These complex effects are ultimately contributing to the structural deterioration of inventory turnover for domestic companies.

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Conclusion: Successful inventory management requires a structural response.

To counteract the instability of the global supply chain, it is urgent to diversify the supply chain. The greater the dependence on a particular region or country, the greater the impact of geopolitical risks or trade disputes, so companies should secure stable alternative supply lines and employ strategies to diversify risks.

Along with this, digital transformation of inventory management systems is also essential. Recent examples of companies that have shown successful inventory management have greatly improved the efficiency of inventory operations through demand forecasting systems using AI and big data, real-time inventory monitoring, and smart logistics systems.

In particular, data-based decision-making through digital transformation will further strengthen the company's responsiveness in the current highly uncertain market environment.

In addition, government-level support is essential. The six anti-dumping complaints filed in the first half of this year alone show that individual companies are limited in their ability to respond. The government should actively respond to unfair trade practices and expand R&D support to strengthen the technological competitiveness of companies.

The reason why such structural changes and government support are urgently needed is that the current crisis is not a simple cyclical phenomenon, but is caused by fundamental changes in the global industrial structure. Therefore, companies will need to go beyond short-term inventory adjustments and simultaneously pursue supply chain restructuring and strengthening of technological competitiveness from a mid- to long-term perspective.