Back order

A back order is a customer order which the supplier cannot currently ship, but expects to ship at a later date. The proportion of customer orders that are on back order is a common customer service metric. Another related metric is the average number of days that a customer must wait before back orders can be filled.

A more refined form of the back order is to only identify an undelivered item as a back order if a customer agrees to wait for the late delivery. If not, the back order is cancelled.

Back orders are heavily influenced by the inventory stocking policies of a business. For example, if management elects to maintain large stocks of all items offered for sale, then the probability of a stockout condition is low, and there will be few back orders. However, this requires a major investment in inventory, and may result in write-offs related to obsolete goods. The reverse situation is to stock minimal amounts of inventory and rely upon customers to wait while back ordered items are acquired elsewhere or produced in-house.

The back order percentage can be used as a competitive advantage. A business could use a variety of inventory management techniques to fill a high percentage of its orders within a short period of time, and then market its order fulfillment rate to customers.

Related Courses

Inventory Management