Procurement functions in Africa are in for a challenging period as they grapple with inflation, geopolitical disruption, and global supply chain constraints. Soaring external spend is putting significant pressure on the profit margins of many companies.
After a prolonged period of low inflation and relatively easy access to goods and raw materials, many businesses—globally and in Africa—may find themselves ill-prepared for these challenges. Procurement organizations have mobilized to manage and optimize external spend, but too many have not exercised the necessary muscles in recent times, leaving their companies behind the global curve in their adoption of digital tools to drive procurement efficiency. Moreover, for the foreseeable future, procurement functions are likely to find it difficult to obtain the goods they need at historical cost.
The squeeze on African profit margins was apparent even before the high inflationary environment took hold across much of the world in 2022. Cost of goods sold (COGS) calculations generally reflect most external spend, such as materials and labor used directly to create a good. Across the top 60 African companies, COGS increased by an average of 21 percent between 2020 and 2021. As this was more or less in line with the revenue increase of 27 percent, it did not negatively impact the overall gross margin.
In some sectors, revenue has increased at least as quickly as COGS, reflecting better management of external spend, better pricing strategy to accommodate for inflation, or both. The positive overall trend is mostly driven by nonenergy materials, with strong revenue increases in the mining sector linked to rising worldwide raw-materials demand after the pandemic.
African companies are exposed not only to the same global economic pressures as businesses in developed economies, but also to a range of region-specific issues. Six macro trends are currently contributing to the volatility of African companies’ COGS:
African procurement functions are competing for goods in an environment of high demand and low or disrupted supply. Because the postpandemic recovery happened faster than expected, demand for raw materials far outweighs supply.
Supply disruptions: Geopolitical instability in Europe is causing supply disruption across the continent, particularly in African countries with strong trading ties to Russia.
Well-documented constraints in global freight markets, particularly in sea freight, containers, and ports, further limit capacity for optionality and global sourcing.
It is true that many African companies are navigating constrained supply and output due to national capacity-control policies, including some related to environmental targets. More than 25 percent of African countries also have local-content policies to boost sectors such as oil, gas, and mining; these could narrow options for sourcing products or services from more competitive markets.
Guest Editorial