• Monday, May 27, 2024
businessday logo

BusinessDay

How Nigeria’s cost-of-living crisis is affecting the supply chain

How Nigeria’s cost-of-living crisis is affecting the supply chain

Inflation in Nigeria has risen to its highest in 27 years as the headline inflation rate for December 2023 rose by 0.72 percent to 28.92 percent year-on-year from 28.20 percent in November, marking the twelfth consecutive increase in inflation rate. Inflation in Africa’s biggest economy and the most populous nation has not climbed this high since mid-1996. Today, food prices have surged, exacerbating a cost-of-living crisis that gravely affects consumers and businesses while mounting pressure on the central bank to raise interest rates further.

This persistent increase in the prices of goods and services poses an enormous challenge to the supply chain web. As the cost of raw materials continues to soar, businesses grapple with escalating operational and production expenses, significantly affecting their bottom line.

Businesses find themselves in a delicate balance of managing inventory to prevent shortages and address surplus challenges. Additionally, inflation reverberates through contractual agreements, making it necessary to renegotiate terms with suppliers and partners, thereby impacting long-term business relationships. The dynamics of supply chains are further complicated, as inflation influences international trade, contributes to currency fluctuations, and challenges cross-border supply chain operations.

As the cost of raw materials continues to soar, businesses grapple with escalating operational and production expenses, significantly affecting their bottom line.

Economic crisis affects supply chains directly.

In Nigeria, transportation costs are a critical component of supply chain expenses. Inadequate capacity and fluctuating fuel prices heavily affect the country’s reliance on road transport, which accounts for a significant portion of cargo movement. Transportation costs surge when fuel prices rise, primarily because of global oil market trends or local subsidy policies. This increase is often passed on to the end consumer, affecting demand patterns.

Also, Nigeria’s heavy dependence on imports for raw materials and machinery exacerbates price increases. For instance, Nigeria imports a substantial amount of its manufacturing inputs, making it vulnerable to global supply chain disruptions and currency fluctuations. When the global prices of these raw materials rise, it directly inflates operational costs for Nigerian businesses. The Naira’s volatility, which also increases the cost of imported materials, further compounds this.

In response, companies may reduce production or seek cheaper alternatives, which can impact product quality. Eventually, the ripple effect will be seen in reduced business profit margins and increased cost of living for consumers.

The other side of this coin is the resultant disruption in the logistics sector that Nigeria faces because of challenges in its transportation infrastructure, including inadequate road networks, port congestion, and underdeveloped rail and air freight capabilities. This inefficiency leads to delays, increased vehicle wear and tear, and higher operational costs.

Because of the inefficiency in the transportation infrastructure which directly affects the distribution networks, it becomes challenging to maintain just-in-time inventory systems, leading to either stockouts or high inventory holding costs. This situation is particularly problematic for perishable goods and can lead to significant losses.

In summary, the economic crisis in Nigeria, characterised by a persistent increase of prices of everything from food and energy to the free fall of the currency in the FX market, which is making importing more expensive, has resulted in rising operational costs for businesses. This is due to increased transportation and raw material prices and disruptions in logistics because of infrastructural challenges, all of which create a complex environment for supply chains. These factors lead to increased costs, reduced efficiency, and potential delays, significantly worsening the overall economic landscape.

What is the way forward?

In response to the economic trials in Nigeria, businesses need to adopt a multifaceted approach to adapt and thrive. Suppliers and transportation methods must be diversified to mitigate risks associated with supply chain disruptions.

Embracing technology can also be pivotal, allowing for better management and forecasting. However, optimising inventory through just-in-time or lean strategies can also significantly reduce costs and improve efficiency. That said, cost efficiency should be a primary focus, and it can be achieved through strategies like renegotiating contracts, optimising transportation routes, or investing in more efficient technologies.

Finally, it is imperative for all stakeholders in Nigeria’s supply chain, including businesses, government entities, and industry associations, to address these challenges proactively. We need a strong collaboration and partnership between the private and public sectors to enhance infrastructure and formulate supportive policies, as the government’s role in prioritising and investing in transportation and logistics infrastructure cannot be overstated.

Simultaneously, businesses should be motivated to embrace innovation and adaptability to remain agile in changing market dynamics and promote sustainable practices and local sourcing to help reduce reliance on unstable international markets. This collaborative and adaptive approach is vital for strengthening Nigeria’s supply chain and ensuring economic stability and growth.