Understanding What is Backorder According to Lean Manufacturing.

In this article, you will learn what is backorder as per lean 6 sigma and lean manufacturing.

Backorder Definition

A backorder occurs when a product or service is not provided on time to a client.

A customer order that cannot be filled (due to inadequate inventory levels) when presented, need it, expected or promised for

which the customer is prepared to wait for some time. The percentage of items back-ordered and the number of backorder days

are important measures of the company’s profitability, the quality of customer service, and the effectiveness of its inventory management.

In summary, a backorder is the “pending products or services which are accumulated after the expected (promised) delivered time

to be sent to the client due to a lack of available supply“.

Understanding What is Backorder

Typically, the backorder is measured in backorder days (number of days late) and amount of product late.

The backorder is a key indicator that demand for a company’s product and services overpass its supply.

It is also called a company’s backlog.

The type 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.  Normally, the higher the number of items back-ordered, the higher the demand for the item.

What does Backorder mean for Business?

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.  A company’s backorders are an important aspect of its inventory management analysis.

The number of products on backorder and how long it takes to fulfill these customer orders can provide insight into how well

the company manages its inventory and supply chain department.

A relatively manageable number of orders and there a short turnaround time to fulfill orders generally means the company is

performing excellently.

On the other hand, longer wait times and large backorders are bad.

How to Measure Backorders

Backorders (company’s backlog) may be represented in terms of money [dollar]—as in the value of sales—or maybe expressed

by the number of units ordered or sold.

Advantages and Positive Aspects of Backorders

The term backorder may implicate a negative situation for the company, but there can be positives aspects to businesses that

have these orders on the accounting books.

Keeping a large supply of stock requires storage space, which, in turn, requires money. Companies that don’t have their own

storage centers have to pay for services to hold their inventory. By keeping a small amount of stock in supply and the rest on

backorder alleviates the need for extra storage, and therefore, reduces costs. This cost reduction can be passed on to consumers,

who will likely return because of a company’s low prices. This is especially true when sales and demand for certain products is high.

Disadvantages and Negative Aspects of Backorders

If a business consistently is in backorder, this is an indicator that the manufacturer’s operations are too short, tight, and lean.

Definitely, it represents that 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 inventories, manufacturing orders, and 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. Difficulties with proper inventory management can lead to the eventual loss of market share

as customers become frustrated with the company’s lack of product availability.

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REFERENCES: What is Backorder.

httpss://www.investopedia.com/terms/b/backorder.asp#:~:text=A%20backorder%20is%20an%20order,manufacture%20more%20of%20the%20product.

httpss://virtocommerce.com/glossary/what-is-backorder