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What Is a Backorder?
A backorder occurs when an item cannot be filled immediately due to insufficient supply, though it might still be in production. Backorders indicate demand surpasses supply. They reflect essential insights into inventory management, demonstrating how companies balance demand and supply for popular items such as next-gen gaming consoles or new tech devices.
Key Takeaways
- A backorder occurs when a product is not immediately available for delivery due to insufficient supply, but is still available for order.
- Backorders may indicate both strong demand and potential issues with inventory management if they lead to long wait times or lost customers.
- Companies can use backorders to maintain lower inventory levels, reduce storage costs, and signal high demand for their products.
- Proper communication with customers about backorder statuses can prevent order cancellations and maintain customer loyalty.
- While backorders can signal popularity, consistently having them might indicate operational inefficiencies and could result in customers seeking alternatives.
How Backorders Impact Supply and Demand
The nature of the backorder and the number of items on backorder will affect the amount of time it takes before the customer eventually receives the ordered product. The higher the number of items back ordered, the higher the demand for the item. Backorders represent any amount of stock a company’s customers have ordered but have not yet received because it currently isn’t available in stock.
Just because they may lack a supply of inventory, that doesn’t mean companies can’t operate on backorder. In fact, companies can still do business even if they don’t have inventory on the books. Keeping products on backorder helps boost demand, retain and increase the customer base, and creates value for their products.
A company’s backorders are an important factor in its inventory management analysis. The number of items on backorder and how long it takes to fulfill these customer orders can provide insight into how well the company manages its inventory. A relatively manageable number of orders and a short turnaround time to fulfill orders generally mean the company is performing well. On the other hand, longer wait times and large backorders may be problematic.
Accounting for Backorders: Best Practices
Backorders or a company’s backlog may be expressed as a dollar figure—as in the value of sales—or by the number of units ordered and/or sold.
Backorders often require special accounting. Companies normally inform customers that the product they’ve ordered is on backorder when the order is placed, and when delivery is expected.
Important
Companies should keep in contact with customers when there is a problem with fulfilling their backorders as promised to ensure orders aren’t canceled.
The sale is then recorded on the company’s books as a backorder rather than a completed sale. If the customer decides to cancel the order, this doesn’t affect the company’s bottom line, and it won’t have to reconcile its accounting records. The company will then place the order with its manufacturer to deliver the goods. Once the shipment is received, the company will then search for the purchase order and follow through with the delivery. The sale can be recorded and then checked off as complete.
Why Backorders Can Benefit Your Business
The term backorder may conjure up negative images, but there can be positives to businesses that have these orders on the books.
Storing a large stock requires space and money. Companies that don’t have their own storage centers have to pay for services to hold their inventory. Keeping a small stock and the rest on backorder reduces the need for excess storage and cuts costs.
This cost reduction can be passed on to consumers, who will likely return because of a company’s low prices. This is true when sales and demand for certain products is high, especially for new releases of highly popular goods.
Backorders attract attention, and some people want to learn more about sold-out items. Although this may conjure negative connotations to some, others will approach backordered goods as a good thing. Backordered goods are popular, in high demand, difficult to get, and may appear as a status symbol.
Challenges and Risks of Backorders
Frequent backorders may indicate that a company’s operations are too lean. It may also mean the company is losing out on business by not providing the products demanded by its customers. If a customer sees products on backorder—and notices this frequently—they may decide to cancel orders, forcing the company to issue refunds and readjust their books.
When an item is on backorder, a customer may look elsewhere for a substitute product, especially if the expected wait time until the product becomes available is long. This can provide an opportunity for once loyal customers to try other companies’ products and potentially switch their loyalties. Poor inventory management can cause market share loss as customers get frustrated with unavailable products.
Backorders may require additional resources in managing pre-orders or clients who are waiting for their product. Companies must manage orders, obligations, logistics, and customer communication, not just sell inventory. The company may also require heavier use of public communication to monitor the situation and further inform the product’s availability.
Fast Fact
Some backorders are more important than others. When a drug isn’t expected to be available for a period of time, manufacturers must report anticipated shortages with the FDA. The FDA announces when the drug will likely be available again.
Real-World Example: Apple’s Backordered Product
When Apple, Inc. releases new products, they’re often met with exuberant demand around the world. Early adopters often want to get their hands on the latest technology, and many users plan on upgrading their old technology for the newer product.
According to Apple’s website, shipments will be sent when the items of order become available. Popular items that are not in stock will be noted with longer timeframes indicated on online orders. Some products may also not be eligible for deliveries with pre-selected time windows.
This is truly a natural part of Apple’s business. In the company’s 10-K, Apple mentions that “disruptions in the Company’s supply chain and sales and distribution channels, resulting in interruptions of the supply of current products and delays in production ramps of new products.”
How Long Does a Backorder Take?
A backorder is a specific situation relating to a direct company or product. There is no regulation or industry standards that stipulate how long a backorder will take. Some companies may publicly disclose when they believe their backorder will be resolved, while others will simply notify customers when their product is available.
What Does Backorder Mean?
An item on backorder is no longer is stock and often in high demand. The product availability is currently trying to be resolved. The company may be trying to manufacture more goods, resolve supply chain issues, or deliver final products to their storefronts.
What Is the Difference Between Backorder and Out of Stock?
A backorder and out-of-stock are similar. Whereas out-of-stock is an indicator that good is not available, a backorder often signifies that out-of-stock order may still be able to be ordered but is not available for immediate shipment. A company may keep a product as out-of-stock if it does not wish to further sell more units of that product. However, a backordered product is more likely to return due to a temporary delay in product availability.
Why Do Backorders Happen?
Backorders occur for several reasons. On the supply side, a company may simply run out of a good due to supply chain issues, underestimated manufacturing capabilities, or lack of delivery to physical storefronts. On the demand side, so many people may be interested in the product, especially if it is a new release of a popular product.
Are Backorders Bad for Business?
Backorders may be bad for business, as customers may search for alternatives instead of waiting for their product to arrive. However, there are a few things to consider. First, some back-ordered products like the next generation of video game consoles are not easily replaceable; loyal customers are often willing to wait. Second, back-ordered goods may garner headlines regarding the popularity of the product
The Bottom Line
Backorders, while sometimes seen as a disadvantage, can provide valuable insights into a company’s inventory management and market demand. They highlight the balance between supply and demand, helping companies optimize their stock levels and reduce storage costs. Companies benefit from backorders when managed effectively by maintaining strong communication with customers and ensuring quick fulfillment. However, excessive backorders may indicate supply chain inefficiencies and lead to potential customer loss. Understanding and managing backorders is crucial for businesses to sustain a positive reputation and retain customer loyalty.
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