What is a backorder (definition)
– A backorder is an order a customer has placed that the seller cannot ship right away because there is not enough stock on hand. It signals that demand is greater than current supply for that item. Backorders can be counted as units, or expressed as a monetary backlog (value of sales waiting to be fulfilled).
Backorder vs. out of stock (short distinction)
– Out of stock: an item isn’t available for sale at that moment.
– Backorder: the item is not available now but orders have already been accepted and are pending fulfillment.
How backorders affect supply and demand
– Backorders are a direct indicator that demand exceeds supply.
– They can raise customer interest (scarcity can boost perceived value) but can also push buyers toward substitutes if waits are long.
– The number of backordered items and the expected wait time together shape customer behavior and market dynamics.
Why companies use backorders (potential benefits)
– Lower inventory holding costs: keeping less safety stock reduces storage and financing expenses.
– Maintains sales: accepting orders while awaiting supply lets a company capture demand rather than losing the sale.
– Marketing signal: high demand and backorders may create buzz for popular launches.
Challenges and risks
– Customer dissatisfaction: long or frequent delays may cause cancellations and lost future business.
– Operational burden: managing backorders requires tracking orders, coordinating with suppliers, and ongoing customer communication.
– Market-share risk: customers may try competitors’ products if waits are long.
– Regulatory sensitivity: for some products (for example, drugs), expected shortages must be reported to authorities.
Accounting and recordkeeping (best-practice points)
– Record the sale as a backorder entry rather than a completed sale until goods are shipped; keep clear linkage to the original purchase order.
– Track backorders both in units and in dollar value so you can assess fulfillment workload and revenue timing.
– Update records immediately on cancellations to remove the obligation and adjust forecasts.
– Keep customers informed about expected delivery dates and shipment status; this reduces cancellations and reconciliation work.
How long does a backorder take?
– There is no universal timetable. Fulfillment time depends on how many units are waiting, supplier lead times, production capacity, and where the goods are in the supply chain. A larger backlog usually implies a longer wait.
Real-world example (summary)
– Major electronics launches often produce backorders. For example, Apple notes that some highly demanded products may be shipped only when stock becomes available and that supply-chain disruptions can delay production ramps. Online order pages may show extended delivery windows for popular or backordered models.
Checklist for managing backorders (quick operational checklist)
1. Identify and quantify: count units and calculate backlog value (units × unit price).
2. Estimate lead times: get supplier/production dates and expected shipment cadence.
3. Communicate: notify customers at order time and provide updated delivery estimates.
4. Prioritize: decide whether to fulfill certain customer segments or channels first.
5. Track cancellations and refunds: remove canceled orders from backlog and update accounting.
6. Reorder and coordinate with suppliers: place replenishment orders and monitor shipments.
7. Reconcile on receipt: when goods arrive, match them to purchase orders and complete deliveries.
8. Monitor metrics: backlog size, average fulfillment time, cancellation rate, and repeat-business impact.
Small numeric example
– Scenario assumptions: unit selling price = $50; current backorders = 400 units; supplier will deliver 100 units per week.
– Backlog value = 400 units × $50 = $20,000.
– Weekly fulfillment rate = 100 units → weeks to clear backlog = 400 ÷ 100 = 4 weeks.
– Accounting treatment (per practice above): the $20,000 remains recorded as backorders (not completed sales) until each shipment is delivered and invoiced; if 50 orders cancel before fulfillment, remove 50 × $50 = $2,500 from the backlog.
Practical tips for customers
– Check the seller’s estimated availability and any stated shipment windows before ordering.
– Ask about alternatives (earlier delivery from another model or seller) if the wait is long.
– Keep records of
communications, order confirmations, promised ship dates, and any written cancellation or refund promises. These records help if you need to dispute delays, confirm price or warranty terms, or verify whether the seller honored promised delivery windows.
– Confirm cancellation and refund policies up front (time windows, restocking fees).
– Ask whether backordered units are reserved for you or sold on a first-come, first-served basis.
– Check whether partial shipments are allowed and whether they incur extra shipping charges.
– If the item is time-sensitive (e.g., replacement parts), request an estimated cure date and alternatives.
For businesses: managing and reducing backorders
Backorders indicate a mismatch between demand and available supply. The practical goal is to reduce their frequency and impact using better forecasting, inventory rules, and supplier management. Below is a compact checklist and a worked example.
Checklist — quick operational steps
1. Measure current state
– Compute current backlog units and backlog value (units × unit selling price).
– Track average weekly/daily demand and demand variability (standard deviation).
– Record supplier lead times and variability (mean and standard deviation).
2. Set service goals
– Choose a target service level (probability you can meet demand from stock; e.g., 95%).
3. Calculate reorder point (R) and safety stock (SS)
– Reorder point = average demand during lead time + safety stock.
– Safety stock (basic statistical method) = z × σd × sqrt(L)
– z = z-score for target service level (e.g., 95% → z ≈ 1.645).
– σd = standard deviation of demand per period.
– L = lead time in same periods.
4. Improve supplier performance
– Negotiate shorter lead times or smaller, more frequent deliveries.
– Establish contingency suppliers or expedited freight options.
5. Operational policies
– Use clear prioritization rules for allocating limited inventory (e.g., FIFO, premium customers first).
– Communicate transparently with customers when backorders occur (status pages, emails).
– Track cancellations and returns; remove them promptly from backlog accounting.
Worked numeric example — reorder point and safety stock
Assumptions:
– Average weekly demand = 200 units.
– Standard deviation of weekly demand (σd) = 30 units.
– Supplier lead time = 2 weeks.
– Desired service level = 95% (z ≈ 1.645).
Steps:
1. Compute demand during lead time = 200 units/week × 2 weeks = 400 units.
2. Compute demand variability over lead time:
– σLT = σd × sqrt(L) = 30 × sqrt(2) ≈ 30 × 1.414 = 42.43 units.
3. Compute safety stock:
– SS = z × σLT = 1.645 × 42.43 ≈ 69.8 → round to 70 units.
4. Compute reorder point:
– R = lead-time demand + SS = 400 + 70 = 470 units.
Interpretation:
– Place a reorder when on-hand plus on-order inventory falls to 470 units to maintain ~95% service level.
– This reduces the chance of future backorders caused by normal demand variation, though not by supplier disruptions beyond assumed lead time.
Handling partial shipments and cancellations — simple rules
– Allocate incoming limited supply using the documented priority rule (e.g., FIFO or customer tier).
– Update backlog records immediately for cancellations: reduce backlog units and backlog value (units × unit price).
– Communicate changes to customers and update estimated clear dates.
Accounting and recognition — concise note
– From a revenue-recognition perspective, most standards (IFRS 15 / ASC 606) require recognizing revenue when control of goods transfers to the customer — typically on delivery and invoicing, not on order entry. Thus, backorders often remain recorded as order backlog (a management metric) rather than recognized revenue until shipment occurs.
– When orders cancel prior to delivery, reduce backlog and any related receivable only when cancellation is firm.
Limitations and assumptions
– The safety-stock
policy, lead times, and demand forecasts used in backlog models are assumptions — not certainties. Key limitations and typical assumptions include:
– Safety-stock and demand forecasting. Safety stock levels assume a predictable distribution of demand and supplier lead times. Sudden spikes (promotions, product failures, channel shifts) or supplier disruptions will invalidate those assumptions and increase backorders faster than models predict.
– Lead-time stability. Calculations that convert open orders into expected ship dates presume stable replenishment lead times. If suppliers extend lead times, the backlog-clearing schedule lengthens proportionally.
– Order cancellation and conversion rates. Backlog metrics often treat all open orders as likely to ship, but a portion will cancel or convert to different SKUs. Models should include an assumed cancellation or conversion rate based on historical behavior.
– Product lifecycle and obsolescence. Backorders for products nearing end-of-life carry higher risk of cancellation or price markdowns. Backlog valuation should reflect potential obsolescence adjustments.
– Data and systems accuracy. Backlog accuracy depends on real-time, reconciled order-entry, inventory, and shipping systems. Latency, duplicate orders, or ERP errors can substantially distort backlog figures.
– Contractual obligations and service levels. Some backorders are tied to service-level agreements, penalties, or prioritized customers; treating all backlog uniformly can misstate the operational and financial exposure.
Practical checklist for managing backorders
– Reconcile daily: match order-entry records to inventory and shipping status; flag discrepancies.
– Prioritize: apply documented allocation rules (e.g., FIFO, customer tier, contract priority).
– Update forecasts: incorporate actual cancellation and fill rates into short-term demand forecasts.
– Communicate proactively: notify affected customers with revised ETAs and offer alternatives (substitutes, partial shipments).
– Record changes: immediately adjust backlog quantity and backlog value (units × unit price) for cancellations or confirmed changes.
– Escalate supplier issues: trigger procurement contingency plans (alternate suppliers, expedited freight) when lead times slip.
– Audit controls: periodically reconcile backlog to ERP and the general ledger; test for duplicate or ghost orders.
Step-by-step example calculations
1) Backlog units and value
– Suppose you have 1,200 units on backorder at a unit price of $25.
– Backlog value = units × unit price = 1,200 × $25 = $30,000.
2) Days-to-clear backlog given production rate
– Available production capacity for this SKU is 300 units per week.
– Weeks to clear = backlog units ÷ weekly production = 1,200 ÷ 300 = 4 weeks.
– If supplier lead time increases by 50%, and that delays replenishment of raw material causing effective weekly throughput to drop to 200 units, weeks to clear = 1,200 ÷ 200 = 6 weeks.
3) Adjusting for expected cancellations
– Historical cancellation rate for open orders is 5%. Expected net backlog units = 1,200 × (1 − 0.05) = 1,140 units.
– Revised backlog value = 1,140 × $25 = $28,500.
Revenue-recognition reminder (accounting implication)
– Under prevailing revenue-recognition frameworks (IFRS 15 / ASC 606), revenue is generally recognized when control transfers to the customer—usually at shipment or delivery—not at order entry. Therefore, backorders are management metrics (order backlog) until the performance obligation is satisfied. Adjust backlog and any receivables only when cancellations are firm or goods are shipped.
Operational actions when backlog grows unexpectedly
1. Quantify the cause: supplier delay, demand surge, capacity loss, or data error.
2. Run a short-term scenario: compute days-to-clear for plausible throughput levels and cancellation rates.
3. Prioritize customers/orders: apply contractual or strategic rules, document allocations.
4. Communicate with customers and sales: provide ETAs and options to reduce churn.
5. Implement mitigations: expedite production, source alternates, or authorize partial shipments.
6. Update financial projections: revise working-capital and revenue timing models to reflect realistic ship dates.
Key performance indicators (KPIs) to monitor
– Backorder units and backlog value (monetary).
– Fill rate: percentage of demand met from stock.
– On-time fulfillment vs promised date.
– Average days-to-ship for backordered items.
– Cancellation rate for open orders.
– Supplier lead-time variance.
Short governance checklist for reporting
– Define standard backlog metrics and a single source of truth (ERP or order management system).
– Document allocation/prioritization rules.
– Set a cadence for backlog review (daily for operations, weekly for executives).
– Maintain an audit trail for order changes and customer communications.
– Ensure accounting closes backlog entries consistently with revenue-recognition policy.
Educational disclaimer
This information is educational and illustrative only. It does not constitute individualized investment, accounting, or legal advice. Consult qualified advisors for decisions specific to your situation.
Sources
– Investopedia — Backorder: https://www.investopedia.com/terms/b/backorder.asp
– IFRS Foundation — IFRS 15: Revenue from Contracts with Customers: https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-with-customers