James Industries is considering a shift to JIT. The president feels that conside

Question

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.


How should the company measure stock-out costs and what can be done to minimize stock-out costs?

Explanation / Answer

To meet customer orders, products has to be available from stock, although some firms are able to arrange deliveries just in time. If a business does not have the necessary stock to meet orders, can lead to loss of sales and a damanged business reputation. This is sometimes called a stock out. It is important that a business either holds sufficient stocks to meet the actual and anticipated orders or can get stocks quickly enough to meet those orders. For a high street retailer in pactice this means having a product on the shelves. A business that is growing will need to review its re -orders and buffer stock levels and the frequencly and size of orders. Look out for seasonality in a business. Larger or more frequent orders may be needed in the business line If the supplier is having trouble in supplying goods on time, the firm might need to re-order at an earlier time. Firms should have back up suppliers in case of delays.

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