What is Backorder?
A backorder occurs when a consumer, either an individual or a company, purchases an item and the item is “out of stock” (not in the inventory of the supplier). A stockout occurs when demand exceeds supply or when a supplier is unable to ship an adequate amount of product to a store on a timely basis.
For example, if a customer were to order something off a retailer like Amazon, and the item was out of stock, the item could be said to be on backorder. A breakdown at any point in the supply chain can cause a stockout and place the item on backorder.
Managing the Supply Chain
Managing a supply chain to ensure that a stockout doesn’t occur is pivotal to a retailer’s success. It is a missed opportunity for any growing business and a failed chance to widen the company’s customer base.
Making a product readily available for consumers to buy can offer cascading benefits in a number of ways. They can include garnering positive word-of-mouth marketing (where consumers brag to their friends and family about how great your product is) and making the merchandise visible on retail shelves to entice a sale.
Stockouts can negatively affect the way a retailer does business and its brand reputation. However, sometimes they can be a part of a larger business plan and unique brand strategy.
Innovative Inventory Management: Just-In-Time (JIT)
Companies employ a variety of innovative inventory and production management techniques to avoid items being placed on backorder and to effectively manage their supply chain. One such method is “Just-In-Time” (JIT). JIT production allows companies to tackle waste in production issues that will lead to diminished output and leave a company open to more stockouts and production backorders.
The JIT method allows for standardization of work at different production stations, which reduces variability in output. It consequently results in fewer defects, and thus less need for rework. This, in turn, creates a more reliable output for producers to ensure they can meet their production targets and sale projections.
Putting it in Context
Wanting to buy something and finding it on the backorder is a nuisance all customers face at one point or another. It can be a huge problem for companies that are looking to grow and that lack stockouts as a part of their business strategy. It speaks of larger problems within the supply chain and how inventory is managed.
However, with accurate forecasting tools and data analytics, problems in the supply chain can be discovered, and innovative production and logistics techniques can be introduced to rectify the issues.
The technical skills built here at Corporate Finance Institute can help in the analysis. They give analysts the ability to analyze and interpret large data sets that will help ensure that businesses are able to avoid any anticipated stockouts and forecast supply and demand accurately.
CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
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