Backorder

What Is Backorder?

A backorder occurs when a customer places an order for a product that is currently out of Inventory Management but is expected to be available again in the near future. Rather than canceling the order, the seller accepts it, promising to fulfill it once new stock arrives. This common occurrence in Supply Chain management reflects a temporary mismatch between Demand Forecasting and available goods. Businesses utilize backorders to avoid losing sales when faced with high demand or unexpected supply disruptions, allowing them to capture revenue that might otherwise be lost.

History and Origin

While the concept of waiting for goods to be produced or shipped is as old as commerce itself, the formalization of "backorder" as a distinct operational status emerged with the increasing complexity of modern Logistics and production. The evolution of Supply Chain management, which gained significant traction in the 20th century with advancements in industrial engineering and operations research, laid the groundwork for managing such scenarios more systematically. Early efforts focused on optimizing manual processes and warehouse efficiency, leading to a greater understanding of inventory flows and the implications of stock shortages. For instance, the very foundation of modern supply chain thinking can be traced back over a century to pioneers like Fredrick Taylor, who focused on improving manual loading processes, highlighting the early attention to material flow and availability within nascent industrial systems.⁶

Key Takeaways

• A backorder means an order has been placed for an item that is temporarily out of stock but will be shipped once inventory is replenished.
• They allow businesses to retain sales and customer interest, even when immediate fulfillment isn't possible.
• Effective management of backorders requires clear communication with customers about expected delays.
• Frequent backorders can signal issues in Demand Forecasting or Supply Chain reliability.
• While useful for sales retention, excessive backorders can negatively impact Customer Satisfaction and brand reputation.

Interpreting the Backorder

The presence and volume of backorders can provide significant insights into a company's operational health and market dynamics. A high number of backorders might indicate robust demand for a product, potentially exceeding a company's current production or Order Fulfillment capacity. While this can signal market success, it also points to potential challenges in scaling operations or accurately predicting consumer interest.

Conversely, a low number of backorders, especially for popular items, could suggest efficient Inventory Management and a well-optimized Supply Chain. However, it could also mean that demand is not as strong as anticipated, or that inventory levels are too high, leading to increased holding costs. Businesses often analyze backorder data in conjunction with other Economic Indicators and sales trends to refine their production schedules and procurement strategies.

Hypothetical Example

Imagine "EcoGadget Inc.," a company that sells popular portable solar chargers through its E-commerce website. After a viral social media campaign, demand for their new "SunBeam 5000" model surges unexpectedly.

On Monday morning, EcoGadget Inc. has 100 units of the SunBeam 5000 in stock. By noon, they receive 150 orders. Since they only have 100 units, the first 100 orders are fulfilled immediately. The remaining 50 orders are designated as backorders.

EcoGadget Inc. immediately notifies these 50 customers that their orders are on backorder, explaining that a new shipment is expected to arrive within five business days. They offer a small discount on a future purchase as an apology for the delay. The company then expedites an order with their Manufacturing partner to fulfill these backorders and restock their inventory, ensuring future orders can be met without significant delay. This proactive communication and management of the backorder helps maintain Customer Satisfaction.

Practical Applications

Backorders are a practical tool in various commercial settings, particularly within Retail, Manufacturing, and E-commerce. They are commonly used when:

• Demand Exceeds Supply: For popular or newly launched products, a company might experience a surge in demand that outstrips its immediate inventory. Accepting backorders allows them to capture these sales rather than turning customers away.
• Custom or Made-to-Order Products: In industries like furniture or specialized equipment Manufacturing, items are often produced only after an order is placed. The order is, by nature, a backorder until production is complete.
• Supply Chain Disruptions: Unexpected events such as natural disasters, geopolitical issues, or transportation bottlenecks can halt production or delay shipments, leading to a temporary inability to fulfill orders. In these cases, companies may resort to backorders while working to resolve the Supply Chain issues. Global supply chain disruptions have been shown to have a significant negative impact on economic activity and trade, influencing companies' ability to deliver goods.⁵,⁴
• Inventory Optimization: Some businesses strategically use backorders to minimize Working Capital tied up in inventory, especially for high-value or slow-moving items. This approach, part of sophisticated Inventory Management, helps optimize Cash Flow and Profit Margins. Governments, such as the U.S. Department of Commerce, have also established initiatives to enhance supply chain resilience, aiming to prevent disruptions that could lead to widespread backorders and economic impacts.³

Limitations and Criticisms

While backorders offer benefits, they come with significant limitations and potential criticisms. The primary drawback is the negative impact on Customer Satisfaction and loyalty. Customers expect prompt delivery, and delays due to backorders can lead to frustration, cancellations, and a decision to take their business elsewhere. Research indicates that frequent stockouts (where products are unavailable) can decrease customer loyalty to both the brand and the retailer.²,¹

Furthermore, managing backorders adds complexity to Logistics and customer service operations, potentially increasing administrative costs. Businesses must invest in robust tracking systems and dedicated communication channels to keep customers informed, which can strain resources. A consistent pattern of backorders can also damage a company's brand reputation, making it appear unreliable or poorly managed. From a financial perspective, while backorders help retain sales, they delay revenue recognition and can impact Cash Flow until the products are shipped and paid for. Therefore, while backorders can be a necessary evil, effective Risk Management and Inventory Management strategies are crucial to minimize their negative consequences.

Backorder vs. Stockout

The terms "backorder" and "Stockout" are often used interchangeably, but they represent distinct scenarios within Inventory Management. A backorder occurs when a customer places an order for an item that is not currently in stock, but the seller expects to receive new inventory and intends to fulfill the order at a later date. Crucially, the order is accepted and recorded, with the customer aware of a forthcoming delay. In contrast, a stockout (also known as an out-of-stock situation) simply means that a product is unavailable, and a customer attempting to purchase it cannot place an order or complete the transaction immediately. The business either cannot accept the order or directs the customer to wait until the product is physically in stock. While a backorder implies an active, accepted order with a delayed fulfillment, a stockout implies an unfulfilled or lost sales opportunity due to immediate unavailability.

FAQs

Why do companies allow backorders?

Companies allow backorders primarily to avoid losing sales when a product is temporarily out of stock. It enables them to secure customer commitment and revenue, especially for popular items or during unexpected Supply Chain disruptions, while new inventory is on its way.

How do backorders affect customers?

Backorders typically result in delayed gratification for customers, as they have to wait longer to receive their ordered products. This can lead to frustration and decreased Customer Satisfaction if not managed with clear communication and timely updates.

Can a backorder be canceled?

Yes, in most cases, a customer can cancel a backorder before the item ships. Policies vary by company, but typically, since payment may not have been fully processed or the item not yet allocated, customers retain the option to cancel if the delay becomes unacceptable. This highlights the importance of good Order Fulfillment communication from the vendor.