Strengthening local sourcing to improve competitiveness

In 2016, Nigeria witnessed a downturn in activities in the real sector occasioned by the economic recession in the country. The manufacturing sector was especially impacted by the restricted access to foreign exchange for the importation of essential raw materials. Two years after, the challenges have eased due to gradual improvement in oil earnings. The downturn remains a learning curve for local producers to explore local alternatives and form alliances with key value-chain operators. FEMI ADEKOYA writes on how manufacturers are now aligning with government’s backward integration policy and reaping the benefits.

For many developed nations, manufacturing has been and continues to be critical to their success. The emergence of several economic blocs is predicated on the desire to explore the potential of the manufacturing sectors.

In Nigeria, it took a recession for many operators to explore opportunities in the local market and exploit incentives created under the government’s backward integration agenda. Grappling with high input cost and weak consumer purchasing power, many manufacturers have had to tweak their operating business models. Many now look inward for new opportunities in local sourcing.

The need to embrace backward integration policy In a chat with The Guardian, President of the Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs, noted that with the present monetary policies, manufacturers need to consider available options in addressing present challenges.

“Given the challenges manufacturers are currently experiencing, there is an urgent need for operators to pay greater attention to local sourcing of raw materials and to align with the government agenda on backward integration. The policy seeks to end the waste of the nation’s scarce foreign exchange on the importation of commodities that can be locally produced if encouraged.” Jacob said.

“This action is indicative of the policy orientation of government and its aversion towards the importation of otherwise locally available inputs and items. This means that the time for increased local sourcing of our raw materials has come. MAN is in support of this proposition and going forward, local sourcing of raw materials should be our first consideration,” he said.

The backward integration policy involves a company or country taking charge of the process related to the supply of the raw materials it needs to churn out its finished products. The goal is to improve the efficiency of its production process, as well as enhance independence and profitability.For instance, the backward integration policy has helped to move Nigeria from a nation that required imports to make up for the short fall in its cement needs to one that have a surplus. Nigeria now exports cement to other nations in West, Central Africa and beyond.

One of the first sectors in Nigeria to be impacted by the backward integration plan was the fruit juice industry that witnessed massive inflow of investment immediately the government implemented an import prohibition on the product to boost local production. Juice brands such as Five Alive, Funman and Chivita became popular after this policy was introduced and importation was banned between 2007 and 2008.

With the cement sector serving as a good example of the success that can result from backward integration, the federal government is prodding investors to explore this option, especially in the agriculture sector.

Aligning with value-chain operators to improve productivity United Nations Conference and Trade Development (UNCTAD) in a recent Trade and Development Report (TDR) emphasised the need for proactive industrial policies to encourage shift in employment and resources from low-productivity agriculture to higher productivity industrial and modern services sectors.

To achieve this, manufacturing activities play a key role in such processes, through the creation of formal employment, incomes and demand, and acceleration of productivity growth, which in turn further boosts incomes and demand.For consumer goods organisations like Unilever, investing in capabilities of intermediary companies to enable them to convert farm produce to usable goods that will be sourced by the company, as part of its raw materials locally is a way of linking its operations with the value-chain operators.

The organization believes this will enable it to achieve a significant reduction in the importation of raw materials by working with local partners. Like FrieslandCampina WAMCO’s Dairy Development Programme model, which seeks to address the country’s challenges in milk production through a backward integration initiative, Unilever Nigeria Plc’s Partner to Win initiative seeks to engage intermediary companies for supply and packaging.

For instance, the Executive Vice President of Unilever Ghana and Nigeria, Yaw Nsarkoh, said 90 per cent of the multinational company’s brands in Nigeria are manufactured locally. “The goal is to achieve 100 per cent. In December 2017, the company commissioned its Blue-Band Margarine factory with the aim of ending the importation of the product” Nsarkoh said.

Providing the motivation for this decision, Nsarkoh stated that, “the backward integration programme of the Federal Government is a sound policy and as an organization we are committed to this initiative. The policy is aligned to our operating business model through which in the last decade saw us enhancing our local sourcing capabilities.”

On packaging, Nsarkoh cited examples of steps taken by Unilever to achieve full backward linkage drive in packaging and agro-based materials.“Already, Unilever has achieved over 80% in local sourcing of packaging materials. The aim is to achieve 100% by the end of 2019 and overcome the current challenges of local vendor’s capacity to meet up with global best standard,” Nsarkoh reiterated.

In agro-allied sector, Unilever is collaborating with intermediary companies, for the supply of cassava and starch.
Partnering to win: Unilever Nigeria’s example For Unilever, the ambition to strengthen its local supply chain is strong and must be achieved. This belief is anchored on its inherent benefits. Partner to win is Unilever Nigeria’s initiative of attracting investors into the country and investing in capabilities of intermediary companies to enable them to locally produce usable goods that will be sourced by the company as part of its raw materials inputs.

The organization believes this will enable it to achieve a significant reduction in the importation of raw materials by working with partners with localised manufacturing processes.Speaking on the economic benefits of aligning with the government on this strategy, Nsarkoh said, “By working with our partners to source these materials locally, we are contributing to up-scaling their technical skills required for manufacturing raw materials inputs in Nigeria. We believe that our partnership with these investors will not only create jobs but also provide support that will enhance their technical know-how and skills.”

The ability of the local suppliers to meet international standards for such materials and the possibility of locally produced goods being more expensive than imported goods are key challenges the company is facing. However, this is not a deterrent factor but an opportunity, which all stakeholders must seize to help create the competitive environment that will make local production more attractive to investors and enable them compete favourably in international markets.

In his reaction, the Procurement Director, Unilever West Africa, Thomas Mwanza said, “our motivation and commitment to operate sustainably is far superior to these challenges. We are working with relevant authorities and local investors to ensure their produce meet the required standard for our products.”