With countries reeling from inflation and the impact of forex on supply chains, many organisations are clearly battling to stay above water. This is especially true in Nigeria. The fact that the forex situation constantly mocks business owners in the country doesn’t help.
It is so dire that banks aren’t selling, and the black market rate is so outrageous that it is laughable.
Supply chains are the most affected by this. The cost of logistics and procurement of raw materials using foreign currency keeps increasing. Ordinarily, businesses pass this on to the consumer, but the constantly rising inflation has made this challenging.
So, as a supply chain manager or a business organization, how do you tackle the increasing cost of forex in the country?
I have outlined some solutions.
Identify and Evaluate Forex Risk in Your Supply Chain
Some areas of your supply chain may be heavily reliant on forex. That means you have to pay your partners in various foreign currencies. It could be for several reasons ranging from raw materials to infrastructures such as machines or robotics.
These areas expose your business and supply chain to the risk of financial loss. So many companies have lost billions of Naira and millions of Dollars in the past year. A good example was Nigerian Breweries. To mitigate these losses, identify the affected areas, evaluate contract terms with your partners, and find alternatives to get the same product or services but at a rate that is not detrimental to your supply chain system.
Identifying or reevaluating the contract terms with your partners may not be easy. Which brings us to the next solution.
Localization of The Supply Chain
As much as globalization of supply chains has its merits, localization may be more advantageous to your supply chain when facing a crisis such as the current forex crisis in the country.
Localizing the supply chain means partnering with businesses or suppliers in areas where demand for your product is predominant. Doing this allows you to pay using local currencies, thereby significantly cutting down the supply chain’s cost.
Localization during a crisis can be quite a tall order. Especially if there is a need for considerable financial investment with no long-term benefit for the company.
Diversify Supplier Base
Diversifying the supplier base allows supply chains to mitigate financial risk. More importantly, it allows the supply chain to leverage a diverse pool of suppliers in the battle against the impact of forex.
Exploiting the power of competition from a diverse supplier or partnership base can drive down the costs of the supply chain. This also helps the supply chain and business avoid getting stranded in times of economic crisis.
You can tap into this phenomenon when tackling the forex challenge. Your business or supply chain can diversify its supplier base and source for local suppliers who can provide the same services if possible.
Diversifying your suppliers may not happen overnight. Primarily because you want to get it right. The wrong suppliers can break your entire supply chain operation. On the other hand, getting suitable suppliers on board may take some time.
Optimize The Supply Chain Network
Businesses have consistently built their supply chains to be flexible, responsive, and agile over the years.
An agile or flexible supply chain can withstand certain crisis levels. This includes crises like COVID-19, the Russian-Ukraine war, and the current forex crisis in Nigeria and Africa.
In building an agile or flexible supply chain, companies or businesses need to align strategically with suppliers, especially suppliers with a local and international presence.
You can optimize your supply chain networks by offshoring, collaborating, and using inventory management strategies.
Currency Hedging or Forward Contracts
Businesses worldwide use this strategy as a standard tool against a forex crisis. Hedging a currency is an insurance for companies in financial agreements or contracts with external partners. In hedging the currency, the company locks in a predetermined exchange rate for future dealings. This type of contract is known as a forward contract.
When working on this deal, it is crucial to determine how both parties will execute the currency hedging. The agreement can be the type of contract where risk is shared equally or the type on a sliding scale.
The problem with currency hedging is that you cannot have it both ways. Say you protect yourself against the rising currency; if the currency falls, you lose money. So, more research and analysis are advised.
Build a Forex Reserve
It goes without saying. Global trade is here to stay. And global supply chains will need ample forex reserves to participate.
As a business owner, one way you can take on the forex crisis in Nigeria is by buying lots and lots of foreign currency. Buying low or in a period of overflow helps limit the impact of forex on your supply chains.
The current trend seems to be on the up. Buying huge amounts of foreign currency now may protect you against higher costs in the future. If you are banking on the rates dipping at some point, you may hold out and buy the dip.
A downside to this strategy is that foreign currency rises and falls with respect to its demand. If you buy too huge an amount, you may contribute to its increase. To enforce this strategy effectively, buy in bits over a long period. If possible, buy from friends or other businesses willing to sell.
Conclusion
One of the major problems with the current forex crisis is access to foreign currency. It is the chief reason for the extreme impact of forex on supply chains across the country. As a supply chain or business, you want to get around the lack of currency as much as possible.
One of the ways to do that is to capitalize on the local currencies. This means doing business locally.
In Nigeria, we import a lot of products or services. The current crisis is an opportunity for businesses in the country to innovate and create more in-house services or products. A crisis is always a time when innovation strives; we will see how businesses handle it in this country.
Obinabo Tochukwu Tabansi is a supply chain mastro and writer with a decade of experience working in different facets of the supply chain. Today he is living his passion for writing on all things supply chain. His blog, Supply Chain Nuggets, is Africa’s fastest-rising supply chain blog, helping professionals, business owners, and curious minds navigate the supply chain complexities on the continent.
