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The purpose of this paper is to investigate vendor managed inventory (VMI) for the supply of medicines between distributors and hospitals to identify factors that may affect VMI adoption.

Two contrasting VMI initiatives involving five organizations (three hospitals, one distributor and one manufacturer/supplier) are studied. A case study method with semi-structured interviews is used with triangulation in data collection, site visits and document analysis to enhance reliability and validity. The cases are analyzed and compared with respect to hospital, supplier, product and supply chain integration characteristics.

A successful public sector VMI initiative and an unsuccessful private sector VMI initiative are identified. The public sector supplier focuses on improving service level while the private sector supplier seeks to strengthen relationships with a key customer. Hospital characteristics, including type of hospital, top management perspectives and the hospital’s willingness to share information, are critical in decisions on VMI initiation or termination. Relatively stable demand products are preferred for a VMI approach. Hospitals may perceive risks in VMI adoption for medicines as it involves relinquishing control of critical supplies and may result in “lock-in” with a particular supplier.

The cases have been conducted in one country, which may affect generalization of the findings. Wider empirical evidence from other countries in both developed and less developed regions will be beneficial.

VMI is advocated as being beneficial in many supply contexts. However, it is challenging to implement. The study identifies factors that affect the adoption of VMI for hospital pharmaceuticals and provides guidance on initiating VMI in a hospital context.

The potential for VMI in public health projects to enable greater access to critical medicines is highlighted.

The paper provides supply side and demand side perspectives on VMI adoption in an important sector. It highlights the need for greater understanding of the perceived and actual risks in VMI from the perspective of both the hospital and the supplier and for much clearer advice on which pharmaceutical products are appropriate for VMI control in a hospital context.