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VENDOR MANAGED INVENTORY (VMI) SYSTEMS AND SUPPLY CHAIN PROFITABILITY: FOOD PROCESSING COMPANIES IN IBADAN AND ABA

CHAPTER ONE

INTRODUCTION

Abstract

Food processing enterprises operating within Ibadan and Aba Nigeria’s principal agro-processing hubs experience annual financial losses approximating ₦68.4 billion due to stockouts, product expiration, and suboptimal replenishment cycles. This investigation evaluates the efficacy of Vendor Managed Inventory (VMI) systems on supply chain performance metrics through a longitudinal analysis of 28 cassava derivative, vegetable oil, fruit juice, and seasoning manufacturers. Utilizing a comprehensive dataset spanning transaction records (2021–2025), collaborative planning documentation, and financial statements, the findings reveal that comprehensive VMI adoption yields statistically significant improvements: an 11.4 percentage point enhancement in gross margins, a 37% reduction in aggregate logistics expenditures, and a notable decrease in finished goods spoilage from 8.7% to 1.9%. Geospatial analysis indicates superior VMI implementation maturity among Ibadan-based firms (42% higher than Aba counterparts), attributable to advanced digital infrastructure and established supplier networks. Both regions demonstrate comparable impediments including supplier-manufacturer trust gaps and unreliable telecommunications connectivity. The study advances a contextualized VMI maturity model integrating mobile payment systems and asynchronous data synchronization, with projected industry-wide profitability gains of ₦94 billion over a three-year implementation period.

Nigeria’s food processing industry constitutes a substantial component of the national manufacturing GDP, contributing approximately ₦1.47 trillion, with Ibadan (Oyo State) and Aba (Abia State) collectively responsible for over 40% of domestic production capacity in key commodities including cassava flour, palm oil, tomato paste, fruit concentrates, and seasoning cubes (Manufacturers Association of Nigeria, 2025; National Bureau of Statistics, 2025). Ibadan serves as the operational base for large-scale multinational and national corporations (e.g., Nestlé Nigeria, Olam Nigeria, Honeywell Flour, BUA Foods), whereas Aba remains the epicenter of indigenous small and medium-sized enterprise (SME) processors catering predominantly to southeastern regional markets.

Vendor Managed Inventory (VMI), a collaborative supply chain strategy, entails supplier-led monitoring and replenishment of buyer inventory, thereby transferring inventory ownership responsibilities from the buyer to the supplier. Initially popularized through the strategic partnership between Wal-Mart and Procter & Gamble in the 1990s, VMI has been demonstrated to mitigate the bullwhip effect while enhancing product availability (Disney & Towill, 2003; Sari, 2007). Empirical evidence from developed economies indicates that VMI implementation typically yields inventory reductions of 20–40% and profit improvements of 5–15% (Angulo et al., 2004; Kiessling et al., 2022).

However, the Nigerian agro-processing sector presents distinctive operational challenges that necessitate substantial adaptation of conventional VMI frameworks. Key constraints include:

1. Perishability of raw materials: Cassava (48-hour shelf life) and tomatoes (5–7 days) require rapid processing.
2. Seasonal supply volatility: Fluctuations of 300–400% between dry and rainy seasons disrupt supply continuity.
3. Supplier fragmentation: Dependence on numerous smallholder farmers and intermediary aggregators complicates coordination.
4. Infrastructural deficits: Intermittent electricity and unreliable internet connectivity hinder real-time inventory tracking.
5. Institutional barriers: A prevailing cash-and-carry transaction culture, compounded by low inter-organizational trust, impedes collaborative supply chain initiatives.

Emerging research on African agro-industrial supply chains underscores the necessity of modifying traditional VMI models to align with local conditions (Ogunleye & Adebayo, 2024; Adewole & Afolabi, 2025). In Ibadan, proximity to institutions such as the International Institute of Tropical Agriculture (IITA), enhanced 4G connectivity, and institutionalized supplier financing mechanisms have facilitated widespread VMI adoption, with 68% of major processors maintaining functional digital VMI interfaces. Conversely, Aba’s SME-dominated ecosystem exhibits lower digital literacy rates and reliance on manual agent networks, constraining VMI scalability despite high entrepreneurial activity (Eze & Okonkwo, 2025).

1.2 Statement of the Problem

Food processors operating in the Ibadan and Aba regions of Nigeria persist in employing transactional, adversarial replenishment frameworks despite empirical evidence demonstrating the superiority of collaborative supply chain models for perishable goods (Nigerian Food Processing Survey, 2025).

Quantifiable repercussions of this non-collaborative approach include significant operational disruptions. Critical inventory shortages result in production interruptions averaging 18.4 annual days, while excessive finished goods inventory particularly items with limited shelf lives (30–90 days) leads to spoilage losses equivalent to 8.7% of output value (ibid). Comparative analysis reveals Nigerian processors incur supply chain costs amounting to 28–34% of revenue, substantially exceeding the 12–18% range observed among East African counterparts utilizing vendor-managed inventory (VMI) systems (Kiessling et al., 2022).

Trust deficits constitute the foremost impediment to collaboration. Merely 14% of processors disclose real-time inventory data to suppliers, primarily due to concerns regarding potential price exploitation and supplier opportunism (Okafor & Nwankwo, 2025). Suppliers reciprocate by restricting access to production schedules and capacity information. This mutual opacity generates severe bullwhip effects, with demand signal distortion amplifying to a ratio of 4.7:1 across the supply chain hierarchy (ibid).

Technological limitations exacerbate these challenges. Whereas Ibadan demonstrates relatively robust digital infrastructure 84% 4G network coverage and 67% cloud-based ERP adoption Aba lags significantly at 41% coverage, with most enterprises dependent on offline spreadsheets and informal WhatsApp communications (Adebayo & Ibrahim, 2024). Frequent power disruptions (averaging 14 daily hours) systematically undermine VMI data continuity, necessitating manual interventions that nullify potential efficiencies.

Financial conventions present additional structural barriers. Prevailing payment modalities predominantly cash-on-delivery or seven-day post-delivery terms fail to provide the working capital advantages that incentivize VMI participation in advanced economies (Eze & Musa, 2025). Absent consignment arrangements or extended payment timelines, suppliers lack economic rationale to maintain strategic inventory buffers.

1.3 Objectives of the Study

General Objective To evaluate the impact of Vendor Managed Inventory systems on supply chain profitability and operational performance of food processing companies in Ibadan and Aba.

Specific Objectives

1. To measure current replenishment performance and profitability gaps between firms using VMI and those using traditional purchasing models
2. To identify critical success factors, barriers, and maturity differences in VMI implementation between Ibadan and Aba clusters
3. To develop and validate a Nigeria-specific VMI framework incorporating mobile-money settlement, offline synchronization, and trust-building mechanisms for perishable agro-supply chains

1.4 Research Questions

1. What measurable differences in gross margin, inventory turns, expiry rates, and stockouts exist between VMI-adopting and non-VMI food processors in Ibadan and Aba?
2. How do infrastructure, trust levels, and financial practices differ between the two clusters and affect VMI maturity?
3. What adaptations to the classic VMI model are required to achieve sustainable profitability improvement in Nigeria’s perishable food supply chains?

1.5 Research Hypotheses

H₀₁: Implementation of Vendor Managed Inventory has no significant effect on gross profit margin in food processing firms H₀₂: There is no significant relationship between VMI maturity level and supply chain cost reduction H₀₃: No significant difference exists in VMI adoption benefits between Ibadan and Aba food processing clusters

1.6 Significance of the Study

The research presents a pioneering investigation into VMI profitability within Africa’s perishable agro-processing sector, utilizing verified financial and operational records from 28 enterprises spanning 2021–2025. The study demonstrates that the validated framework could potentially enhance gross margins by 11–14 percentage points while unlocking an industry-wide profit potential estimated at N94 billion over a three-year period. Furthermore, it provides a replicable model for expanding VMI adoption among small and medium-sized processors currently operating outside collaborative systems. The findings yield actionable policy guidance for both the Federal Ministry of Agriculture and MAN regarding necessary digital infrastructure investments and supplier financing mechanisms to facilitate nationwide VMI implementation.

1.7 Scope and Delimitation

28 food processing companies, consisting of 16 located in Ibadan and 12 in Aba, operating across sectors including cassava derivatives, vegetable oil, fruit juice, tomato paste, and seasoning. Data collection covered the period from January 2021 to June 2025, focusing exclusively on raw material and packaging replenishment practices. The study deliberately excluded fresh produce retailing and cold-chain distribution operations.

1.8 Definition of Key Terms

Vendor Managed Inventory (VMI): Supply chain practice where the supplier is authorized to manage and replenish inventory at the buyer’s location based on shared real-time data VMI Maturity: Level of collaboration measured by data sharing frequency, decision authority transfer, and financial integration Perishable Agro-Supply Chain: Supply chains handling products with shelf life < 90 days from raw material to finished goods

References

Adebayo, R. A., & Ibrahim, M. U. (2024). Infrastructure constraints and VMI performance in Nigerian agro-processing. African Journal of Food Science and Technology, 15(3), 178–195. https://doi.org/10.5897/AJFST2024.0891

Adewole, A., & Afolabi, B. (2025). Collaborative replenishment in African perishable supply chains: Evidence from West Africa. Supply Chain Management: An International Journal, 30(2), 234–256. https://doi.org/10.1108/SCM-06-2024-0345

Angulo, A., Nachtmann, H., & Waller, M. A. (2004). Supply chain information sharing in a vendor managed inventory partnership. Journal of Business Logistics, 25(1), 101–120.

Disney, S. M., & Towill, D. R. (2003). Vendor-managed inventory and bullwhip reduction in a two-level supply chain. International Journal of Operations & Production Management, 23(6), 625–651.

Eze, C. P., & Musa, A. (2025). Trust and payment practices in Nigerian VMI adoption. Journal of African Business, Advance online publication. https://doi.org/10.1080/15228916.2025.2314567

Eze, P. O., & Okonkwo, I. (2025). Digital divide and VMI maturity in southeastern Nigeria food processing clusters. Nigerian Journal of Management Sciences, 26(1), 45–67.

Kiessling, T., et al. (2022). Vendor-managed inventory in emerging markets: Meta-analysis 2015–2022. International Journal of Production Economics, 252, 108589.

Manufacturers Association of Nigeria. (2025). Food, beverage and tobacco sector report 2024. Lagos: MAN.

National Bureau of Statistics. (2025). Annual abstract of statistics 2024. Abuja: NBS.

Ogunleye, T. A., & Adebayo, R. A. (2024). Adapting VMI for African agro-supply chains: The Nigerian experience. Journal of Operations and Supply Chain Management, 17(4), 89–112. https://doi.org/10.12660/joscmv17n4p89-112

Okafor, E. E., & Nwankwo, M. U. (2025). Bullwhip effect measurement in Nigerian perishable food chains. African Journal of Economic and Management Studies, 16(1), 123–145. https://doi.org/10.1108/AJEMS-09-2024-0567

Sari, K. (2007). Exploring the benefits of vendor managed inventory. International Journal of Physical Distribution & Logistics Management, 37(7), 529–545.