Definition: Back-orders are customer orders not fulfilled because of inventory shortages. In general, a backorder is the list or group of orders that remain unsatisfied until the organization is ready to deliver them.
What Does Backorder Mean?
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Every company has limited resources to perform its activities. Under this framework, it is possible to receive customer orders that exceed existing capacity in some periods. This situation can result from either an inadequate inventory management or an outstanding demand. Although the company might see this situation like a healthy signal of commercial success, it implies risks.
The unfulfilled customers have to wait more than usual to receive the required product or service and therefore some of them might decide to cancel their orders. Bad customer opinions sometimes diminish the purchasing intention of other potential buyers. In this regard, all organizations must carefully achieve a balance between high capacity utilization and low backorder rate.
Example
Carty Inc. is a firm that manufactures and markets Carty, a brand of women shoes. At Christmas time, many women tend to purchase additional shoes. They want to buy new shoes for themselves but also for their friends and relatives.
From January to November, Carty Inc receives an average of 1,500 pair of shoes ordered per month. But in December, the number can go as far as 3,000 pairs. Since the productive capacity is only 2,500 pairs per month, the company used to have severe conflicts to satisfy demand at Christmas season.
Many customers were unhappy and tried other brands. In order to solve this issue, the firm decided to produce in advance part of the expected demand for December. The most popular items are now over-produced and stocked during September, October and November.
In this way, the firm now can fulfill around 95% of the required items in December thanks to a successful backorder management strategy.
