JIT and Stock-Out Costs

Essay

JIT and Stock-Out Costs
James Industries is considering a shift to JIT. The president feels that considerable costs can be saved by reducing inventory. The marketing manager is worried, however. She recognizes that the inventory holding costs such as storage and the opportunity cost of cash used to hold inventory are high and will be reduced if the company changes to JIT. But she is worried that the president has forgotten about stock-out costs. Stock-out costs occur when customers want to purchase an item, but the item is not immediately available so the customer goes elsewhere to make the purchase.
Required:
How should the company measure stock-out costs and what can be done to minimize stock-out costs?