A backorder happens when a customer orders an item that the company can’t send right away because it’s not in stock. Backorders are different from out-of-stock items since they’re still available to order and are often on their way back into inventory. They signal high demand or issues within the supply chain, so they’re more than just a temporary inconvenience—they can provide insight into what’s happening within a business.

Key Takeaways of Backorders

When demand for a product exceeds supply, backorders pop up—a few backorders with quick fulfillment show that customers want the product, which can be good. However, if backorders are high and delays keep happening, that may frustrate customers and indicate inventory problems. On the positive side, backorders can help businesses lower storage costs, avoid extra inventory, and even create a buzz around popular products.

Understanding Backorders

Backorders aren’t just about temporarily unavailable items. They affect customer satisfaction and inventory management. Short backorders show a product is in high demand, and customers may be more patient. But long backorders can test their patience, leading to cancellations and lost sales. From an inventory standpoint, tracking backorders gives businesses a clear view of demand, potential issues, and areas for improvement.

Accounting for Backorders

In accounting, backorders aren’t treated as complete sales until fulfilled. Instead, they’re recorded as pending orders, often tracked in units or total dollar value. Keeping customers informed about backorder status is crucial; customers need to know when they’ll receive their items. This transparency helps manage expectations and prevents order cancellations, keeping relationships strong.

Causes of Backorders

Backorders can happen due to demand or supply issues, including:

• Demand Surges: Sudden jumps in demand, like during the holidays or a new product launch, can cause backorders if the company isn’t ready for it.
• Supply Chain Delays: Supply chain issues like manufacturing delays or raw material shortages can slow product availability and cause backorders.
• Human Errors: Warehouse management errors, such as inaccurate stock counts or delays in restocking, also contribute to backorders.

Understanding what caused a backorder can help prevent future occurrences.

Advantages of Backorders

While backorders can seem negative, they offer several benefits:

• Reduced Storage Costs: Keeping fewer items in stock means lower storage fees, which can cut costs for the business.
• Improved Cash Flow: Accepting orders even when stock isn’t available allows businesses to continue making sales without holding excess inventory.
• Natural Marketing: A backorder product often appears more desirable due to its popularity, which makes customers even more interested.

These advantages make backorders valuable for many businesses, especially those with limited storage space.

Disadvantages of Backorders

On the flip side, backorders come with some challenges:

1. Customer Dissatisfaction: If delays are too long, customers may cancel orders and look elsewhere, risking future sales and loyalty.
2. Lost Market Share: Prolonged backorders can cause customers to shift to competitors, especially if the latter are often out of stock.
3. Increased Complexity: Managing backorders involves extra steps in customer communication and order fulfillment, adding complexity to operations.

Effects of Backorders on Supply Chains

Backorders affect the entire supply chain, creating a “bullwhip effect.” When a company needs to catch up on backorders, it often places larger orders with suppliers. It can cause suppliers to ramp up production to meet demand, leading to excess inventory once the demand normalizes. It puts extra pressure on suppliers, increases supply chain costs, and can result in more inventory than the company can sell.

Managing and Minimizing Backorders

Handling backorders requires a proactive approach, including strong customer communication, a reliable order management system, and smart inventory planning. Businesses can use systems that provide real-time data and alerts when stock is low. Reviewing reorder points and setting accurate safety stock levels helps keep inventory steady, reducing backorders over time.

Best Practices for Handling Backorders

Here are some best practices to help make backorders manageable:

• Keep Customers Informed: Stay transparent about delays and expected delivery dates.
• Set Backorder Limits: To avoid long wait times, keep backorders open for a set time, like 30 days.
• Develop Contingency Plans: Have backup suppliers or sourcing options ready to prevent backorders.
• Train Employees on Customer Service: Ensure employees understand how to handle customer inquiries about backorders.

These practices help manage customer expectations and keep the business running smoothly.

Backorder Rate KPI

Tracking backorders is essential to understanding inventory efficiency. The backorder rate shows the percentage of orders that face delays, reflecting customer experience and inventory management. Here’s how to calculate it:

Backorder Rate = (Delayed orders from backorders / Total orders placed) x 100

Keeping a close eye on this rate helps businesses monitor demand and prevent long-term inventory issues.

Tips to Minimize Backorders

Minimizing backorders comes down to better planning and real-time data. Here are a few ways to reduce them:

• Focus on Key Inventory: Keep popular items well-stocked to prevent backorders on high-demand products.
• Use Real-Time Data: Monitor stock levels closely to prevent stockouts and react quickly.
• Set Stock Alerts: Set alerts for low stock to replenish inventory before a backorder occurs.
• Diversify Suppliers: Having multiple suppliers keeps stock levels more reliable, even if one supplier falls behind.

With these strategies, businesses can meet customer demand more consistently and reduce the chances of backorders.

Backorders are a regular part of business, reflecting demand and potential supply chain issues. With the right approach, businesses can manage backorders effectively, keeping customers satisfied and inventory flowing.

Conclusion

Backorders are a natural part of business, especially for high-demand products. While they can be frustrating for customers, they also offer valuable insights and benefits for businesses—like keeping storage costs low and creating excitement around popular items. The key to managing backorders well is to keep customers in the loop, use real-time inventory data, and have backup options when demand spikes unexpectedly. By staying on top of these orders and handling them efficiently, companies can turn backorders into an advantage, keeping customers happy and building loyalty.