James Industries is considering a shift to JIT. The president insists that reducing inventory can save considerable costs. The marketing manager is worried, however. She recognizes that the inventory holding costs, such as storage and the opportunity cost of cash consumed to hold inventory, are high and will be reduced if the company changes to JIT. She is concerned that the president has forgotten about stock-out costs. Stockout costs occur when customers want to purchase an item that is not immediately available and go elsewhere to make the purchase.

How should the company measure stock-out costs? What can be done to minimize them?