Samsung was founded in 1938 as a trading company- and in the 50s/60s went into various businesses including insurance, paper, aerospace, property and even retailing. During the 70s, Samsung acquired a small semi-conductor company and grew it exponentially. During the 80s, Samsung became the third company in the world to develop a 64KB DRAM. From then on, Samsung successfully grew to become the largest South Korean conglomerate, largest smart phone manufacturer and second largest technology company in the world.
Samsung is currently facing a major problem stemming from their low rate of inventory turnover.
Inventory turnover is a financial ratio used to ascertain how quick an organization turns its inventory into cash within a year and further measures the rate at which a company turns its inventory into cash through sales. A typical manufacturing company that operates at full capacity is expected to utilize its full potential to generate revenue. The efficiency with which a company will utilize its inventory to earn sufficient income also depends on the inventory management strategy that the company has employed to carry out its business management and activities. This should be implemented within a period of one year to ensure that accounting for such impacts is accurate (USA, 2013, 67).
Inventory turnover prevents a manufacturing from having stocks that are not saleable within its premises but rather have only inventory that can be sold for income generation. With a higher rate of stock turnover, a company is said to be liquid since it can easily turn its stocks into cash and finance its operating activities. However, a company with lower rate of stock turnover is less liquid since it takes a longer duration to turn its stock into cash for operating its business activities (Bose, 2014, 56).
The rate of inventory turnover of an electronic manufacturing company depends on the cost of goods available for sale and the total inventory within the possession of the company. Samsung is one of the many giant electronic companies with a global presence and are facing stiff rivalry and competition from Apple Inc. For it to have a strong inventory turnover that would guarantee a good return on its investments and sales, Samsung needs to raise its inventory turnover rate. Looking at the efficient rate of inventory turnover that Apple has achieved in the past year, there is room for improvement and Samsung has all the potential and opportunity to realize a more efficient rate of inventory turnover that is at par with the industry ratio (The USA, 2013, 43).
From Figure 1 in the exhibits’ section, we note that Dell’s inventory turnover days are lower than that of Samsung Electronics, an indicator that Samsung that has failed to employ the most effective inventory management strategy to manage its stock. This means that Dell Electronics is also posing a threat to Samsung in the competitive electronic industry and may end up locking it out of many prospective markets in future. To avoid such predicament, Samsung Electronics would need to rather employ a strategy that would help it achieve a higher rate of inventory turnover, increase its sales revenue and thus higher profitability. This way, it would be able to overcome the numerous threats and challenges that Dell Electronic and Apple Inc. may have posed in the competitive electronics industry (Apple Inc. 2017, para 7).
Samsung Electronics has for quite a long time experienced challenges with its supply chain management resulting in its low rate of inventory turnover. Under its working capital, the company has registered a lower rate of inventory turnover below the 99% mark recorded by other rivals like Apple Inc. Also, Dell has managed to record a higher rate of stock turnover yet the three companies operate in the same market niche and industry. It is quite important to note that it only take Dell Electronic 20 days to completely sell its stocks and recover all the proceeds from sales while Samsung will take 21 days to complete its stock turnover initiatives. The most alarming fact is that the stock turnover for Apple remains staggering at 0.2 days, indicating a very effective and efficient inventory management at the company as compared to Samsung and Dell (The USA, 2013, 87).
The variance in the rate of inventory turnover between Samsung, Apple, and Dell is a major concern because the recommended inventory turnover ratio for a typical electronics manufacturing company should be around 8 days. This means that with all the potential and efficiency of the manufacturing working to the full capacity, the company should be able to collect all revenues and sales proceed from its inventory within 8 days. Thus, a company with a lower rate of inventory turnover is very efficient while a company with a higher rate of inventory turnover is said to be less efficient and not operating to its full capacity, potential, and capability. As such, the trend in the rate of inventory turnover in Samsung and Apple raise more questions than answers.
There are many reasons that may lead to the difference in the rate of inventory turnover between Samsung, Apple and Dell. The mere fact that these three companies operate in the same industry and exploit the same market is not enough reason to make them have a similar rate of inventory turnover. The competitive advantage, the market niche, the marketing strategy and the supply chain strategy employed by these three companies are significant determinants in ensuring that the company achieves a suitable rate of inventory turnover. Inventory management technique and strategy employed by the three companies also determine how best the three companies will achieve a reasonable inventory turnover rate.
For a manufacturing company to have an effective inventory turnover rate, it must put in place inventory management measures and strategy that will safeguard the process of inventory use and sale for the benefit of the company. This means that the company must remain focused in its mission and visions of achieving the higher return from its inventory in terms of sales revenue. As a result, the company will strive to ensure that its inventory is utilized in the most effective and efficient manner that can help to generate high returns from the company operations. Furthermore, it is in line with the marketing mix that a company ensures that its inventory is viewed as a source of revenue generation in the business.
The rate of inventory turnover at Samsung is lower and takes longer days because the company has a large product portfolio that is diversified across many segments. These products serve different market niches with unique specification and characteristics. As such, Samsung will find it very difficult to use a single supply chain management technique of inventory management strategy to increase its inventory turnover rate. Perhaps, this is a reason why the inventory management strategy of Samsung is quite a different form that employed by Apple Inc.
The horizontal growth strategy employed by Samsung is also a key determinant of its slow rate of inventory turnover. Unlike Apple Inc. that has managed to rely on a vertical growth strategy to increase the efficiency of its inventory turnover, Samsung still relies on three divisions to spearhead its inventory management and supply chain segment in the competitive electronic market (Bose, 2014, 68).
Samsung is also less liquid and is less efficient as compared to Apple Inc. and Dell Electronics. The high leverage position of Samsung has however seen the company manage to overcome the stiff competition in the electronic industry and is on the right path of recovery despite the high rate of stock turnover. At a turnover of 7.04 stocks, or rather 21 days. Samsung is at a better position than Apple that stands at 0.2 days, or rather 57.94. This is an indicator that Samsung has a very poor sales volume that has led to a decrease in its profitability by a significant margin. This is also an indicator that Apple and Dell Electronic are holding fewer stocks that it can easily sell within a short period of time when compared to Samsung that holds huge amounts of inventory that end up remaining unsold at the end of the trading period. The strong sales at Apple have been occasioned by its inventory management strategy and techniques that strive to reduce the amount of inventory in its possession through increased sales volume.
The fact that Samsung Electronics has managed to do 17 sales turns, Dell Electronic 36 sales turns while Apple is leading with 74 sales turns clearly indicates that Samsung is facing numerous challenges as it strives to increase its leverage in the electronic market and remain competitive as its two main rivals in the industry.
The cash conversion cycle of a manufacturing entity refers to the ability of the manufacturer to ensure a healthy and efficient management of its cash. It is however presumed that the cash must be generated from the sale of the proceeds of the manufactured goods. As such, the inventory management and the inventory turnover rate is key in determining how efficient a company utilizes its stocks to have a sound conversion cycle.
Furthermore, the cash conversion cycle indicates the overall financial health of the company in converting its stocks into cash for operating activities. This means that the inventory of the company, the accounts payable attributed to the suppliers, the accounts receivables attributed to its customers and the bank’s balances are crucial in determining the financial health of the company. The duration is measured in dollars from the production to the sales point and the moment money is received from the customers. Thus, it gives an estimate of the duration taken to collect receivables attributed to all the company’s inventories.
The current level of inventory of Samsung is higher than that of Apple Inc. and Dell Electronics. Similarly, the current sales of Samsung Electronics are less than the current sales of Apple Inc. Equally, Samsung takes 20 days to collect the dues from customers. Dell Electronics takes 17 days while Apple Inc. only takes 2 days to collect such cash proceeds. With a longer duration between the productions, sales and actual receipt of the cash, Samsung is operating inefficiently. However, Apple Inc. and Dell Electronics seem to have a shorter period, indicating efficient companies. Thus, it is easy for Apple to manufacture inventory, sell and then collect the cash proceeds within a shorter duration when compared to Dell Electronics and Samsung Electronics (Dell Electronics, 2017 para 4).
From figure 2 in the exhibits’ section, we can deduce that Samsung’s cash conversion cycle seems to be quite slow since the company withholds its stock in its stores and warehouses before it finally releases them for sale in the market. Despite this being a good inventory management strategy for the company, it seems to sit is working in the favor of key rivals like Dell and Apple Inc. who have capitalized on mass production with demand and supply being the drivers of their production cycle (Apple Inc. 2017 para 5). As a result, Dell Electronics has registered a higher cash conversion cycle that has led to an efficient and effective inventory managements and inventory turnover. This is the same case with Apple Inc. that has seen a tremendous increase in the quantity of inventory sold with the higher rate of conversion cycle as compared to the other two industry players. Samsung seems to be trailing behind the two major competitors in the market as it has chosen to spend more money in warehousing, stock holding and storage costs.
Operating cycle of a manufacturing company is the average duration that the entity is expected to put in place an initial cash outlay that would be spent in the manufacturing process. It also refers to the initial duration that the manufacturer has set to collect cash proceeds from the sales of the manufactured products that is attributed to its customers. An operating cycle refers to the duration of cash inflows and outflows to ensure that the manufacturer is operating efficiently without any cash crisis in future.
The operating cycle enables manufacturers to function will little sales margins. Samsung Electronics has adapted flexible payments terms that give the customers longer duration of payment and shorter payment on its suppliers thus increasing its operating cycle. On the other hand, Apple Inc. and Dell Electronics have longer payment terms for suppliers and shorter payment terms for customers that has led to a shortened operating cycle that delays any possible cash outflow while increasing the cash inflows. Samsung also practices order fulfillment as opposed to Apple Inc. and Dell Electronics, a fact that has also seen its operating cycle shorten. Equally, the credit policy of Samsung is more flexible than that of Apple Inc. and Dell Electronics where credit is rarely advanced.
The operating cycle of Samsung Electronic is also lower than that of its two main competitors in the inserts. Even the industry operating cycle is quite higher than that of Samsung, an indicator that Samsung is operating inefficiently. Perhaps, Samsung could be employing operational strategies that are not working well to ensure that its sales revenues match its inventory volumes at specific times of the year. Samsung seems to be operating on an annual cycle where all products must be sold by the end of the year. This has caused a lot of delays and complications in the inventory management process where all the available inventory is piled and only released when the year is just about to end. As a result, Samsung electronics end up with many unsold due to inability to meet the demand in the market at the prices it is planning to sell the inventories.
Dell Electronics on the other hand has adopted the operating cycle where its products are manufactured on demand basis. The demand of the product determines how the company manufactures the electronics and sells them. This operating cycle has seen the company achieve higher inventory rate of return due to the high sales volume it registers with little stocks left idling in the company premises. Besides, it has ensured that each product is sold at the prevailing market prices, thus cushioning the company from the possible loss in case the prices falls or demand decreases below the supply of its products in the market. Besides, Dell Electronics has managed to ensure that it decreases the risks of facing stiff competition from its rivals who have ineffective operating cycle procedures.
Apple Inc. seems to have the best operating cycle amongst the companies making it have the most efficient inventory rate of turnover among the three industry players. At Apple, products are manufactured through assembly line methods, thus reducing the cost of operation. With its market segmentation, the company has managed to identify the different needs and wants of its diverse customers, thus makes customized products that suit the needs and expectations of each customer. Thus, this has managed to work well for the company as it has resulted in an increase in its sales volume and profits over the past few years (Apple Inc. 2017, para 5). The exhibit in figure 3 shows Apple’s quarterly revenues in the years leading up to the beginning of 2017.
