Supply chain management in Africa needs a rethink

Lilac Nachum - Cobid-19 has laid bare the vulnerability of the supply chain model that has dominated the way African firms have organised their production.

In this model, firms rely on multiple suppliers, many of whom are located far away (mostly in China).

With goods stuck at factories and ports around the world and shortages emerging, the pandemic disrupted the supply of most essentials. It also exposed the weakness of global interdependencies. Foremost among these were of course the essential medical devices needed to save people’s lives. Shortages were apparent also in many food items, consumer electronics and other necessities.

As we leave behind the worst of the pandemic and African managers across industries prepare for the post-Covid era, there is a need to reconsider the underlying logic of supply chains. That means rethinking the trade-offs between the benefits of globally dispersed production and the need for secure supply and quick delivery.

Three things should guide managers in this:

• Short-term versus long-term effects of Covid-19 on the organisation of production and delivery;

• changes imposed by the pending African Continental Free Trade Area; and

• green industrialisation (sustainable growth).

As an international business professor with several decades of experience in researching supply chains in an interconnected world, I have come to realise that these are the issues that should shape supply chains in the post-Covid era.

SHORT TERM VS LONG TERM

Before Covid-19, the patterns of production and supply of most products were largely based on the benefits that could be derived from cross-country variations in costs and resources. The gains of low-cost trade enabled companies to move products across countries at low cost. The pandemic outbreak challenged this logic.

The need to secure supply and ensure speedy delivery – especially, for example, of medical supplies – replaced the cost, skills and resource availability considerations that guided supply chain arrangements in different times.

As managers reconfigure their supply chains for the post-Covid era, they ought to distinguish between short-term changes imposed by the pandemic and lasting ones that cause structural changes to the way supply chains operate.

Shortages of supply and bottlenecks in production are likely to end. In fact, some of them are already disappearing, so there may not be a need to introduce major changes in response.

In parallel, many of the traditional benefits of supply chains have remained in place.

There are still economic reasons to follow many pre-Covid practices and resume some production routines that prevailed in this era. Country differences in costs, skills and resource availability continue to offer compelling reasons for supply chain operations.

In contrast, the growing digitisation of some supply chain transactions and the greater virtualisation of economic activity that took place during Covid-19 appear to have left a lasting effect. For example, digitisation created new opportunities to coordinate activities and communicate with consumers in more efficient ways than was previously conceived and to reduce costs.

These developments are likely to shape the supply chains of the future and should be reflected in the reconfiguration of supply chains.

TRADE PACT

The African Continental Free Trade Area (AfCFTA) agreement among all African countries has immense economic significance. If successfully implemented, it is likely to change the rationale for local and regional organisation of production and supply across the continent.

High trade costs in Africa – by some measures five times higher than those elsewhere – have undermined the benefits of separating production activities across countries and supplying distant markets.

In July 2022, the African Continental Free Trade Area Council of Ministers announced an initiative on guided trade, a pilot phase that allows seven African countries to begin trading under the new regime.

By reducing the cost of cross-border activities, the agreement removes many barriers and increases potential gains from the separation of production activities across African countries.

Low-cost trade makes it economically viable to connect separately located production facilities. This increases the potential advantages of specialisation and scale. It changes the economic rationale for the organisation of production.

Low trade costs among African countries can also transform a continent of 55 mostly small countries into a single market of 1.4 billion potential consumers. This market size is only slightly below those of India and China. It enables firms to reach out to remote consumers and reap the advantages of scale.

ENVIRONMENTALLY SUSTAINABLE

The need to rethink supply chains opens opportunities for green industrialisation.

African firms are well positioned to join ‘green global supply chains’ as suppliers of key natural resources. These include, for example, scarce minerals like cobalt and lithium that are abundant in many African countries and are in high demand in many green industries. They can leverage their favourable access to these key natural resources, creating their own supply chains or supplying those controlled by others.

There’s another advantage for African firms in these kinds of supply chains: being at early phases of industrialisation, they do not carry the burden of the past, as do many of their counterparts in other parts of the world. They do not have to cope with sunk costs of changing old infrastructure and equipment that is expensive and difficult to replace.

MANAGEMENT CHOICES

As I have laid out, these contemporary developments call for rethinking fundamental decisions related to the configuration and management of supply chains in Africa.

The choices managers make in relation to these developments will have a material impact on their competitiveness and financial performance. African managers should embrace them heartily! – The Conversation

* Lilac Nachum is a professor of international business at the City University New York, a Fulbright scholar to Africa, and a visiting professor at Strathmore Business School at the City University of New York.