The Best Defense is A Good Offense: Inflation & Kenyan Logistics

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Published On:

May 11, 2014
Photo credit: Wikimedia Commons

Photo credit: Wikimedia Commons

Even those of us with the most tenuous grasp on financial concepts understand one thing: inflation is bad.

The amorphous concept of inflation is associated with our currency losing value while our cost of living steadily increases, a nightmare situation for anyone concerned with paying bills and supporting loved ones financially.

Complex details aside, the news that Kenya’s inflation rate for April had gone up to 6.41 per cent from March’s 6.27 per cent does not bode well.

As minimal as the increase may be, bolstered by a 1.6 rise in the cost of food and non-alcoholic drink, it still puts us above the 5 per cent target set by the Central Bank of Kenya.

With the effects of inflation felt across every facet of daily life, we in the logistics industry are not immune.

The most obvious way inflation negatively influences the industry is by eating into our profit margins.

With the cost of living going up, the cost of running the business similarly rises, interfering with the balance of cost to income that companies rely on to continue making money.

Key sectors rapidly influenced by inflation are fuel and electricity, whose prices are likely to shoot up with slight increases in inflation.

This means increased overhead costs for supply chain management firms, cutting into our profits as income likely remains constant.

Similarly, labor costs are likely to go up as employees require more money to meet rising costs of food stuffs and basic needs, again expanding overhead costs beyond the optimum mix.

Photo credit: African Business Review

Photo credit: African Business Review

As not much can be done about the rising production costs, supply chain managers are forced to try and bring up their income to restore their businesses to profitability.

In this case, a straightforward but unpleasant option is by increasing prices of services.

This is always a tricky concept to execute for any business as customers generally do not respond well to hikes in prices of products and services they have used at a lower rate, leading to some ceasing their business with the logistics company in question to search for a more economical option.

As many companies within our industry rely on payment after delivery of service, as it is the trend out of competition, mostly with a small upfront deposit or nil, inflation poses a unique threat.

Supposing one of the clients a logistics firm is working with is unable to adjust to a particularly high inflation rate and the consequences that comes along with,  it is very possible for the company to go out of business, meaning the loss of a regular customer and difficulty in getting fees owed to the supply chain management firm.

There is generally little we can do to protect ourselves from the fall out that comes with inflation in the nation. In most cases, the only recourse we have is to seek ways to become more efficient, by reducing waste and seeking to optimize operations as much as possible, so why not get a head start?

With the position of the economy being unpredictable at best, the best defense our industry has against the trials of possible future inflation is a good offence: by optimizing our processes well in advance. Do have a productive weekend, won’t you?


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