![]() In addition, placing too many backs orders can lead to difficulty tracking inventory levels across suppliers and carriers, causing excess costs in managing those items. If a company has only 10 units of a certain product, and 30 customers place an order, then 20 customers must wait until additional products become available to ship those items. A customer can place a back order with the understanding that the ordered product will be shipped to them as soon as it becomes available.īack orders are usually created because demand for a certain product outweighs the supply. If a competitor can provide better products or service, then customers will leave.A back order occurs when a customer places an order for a product that is currently unavailable or out of stock. ![]() This is a particular concern when customer loyalty is not strong instead, they had previously only been placing repeat orders out of habit. Another concern is that repeated backorders can result in the permanent loss of customer loyalty, who never return to the organization to place orders. This happens because customers are not willing to wait for the firm to deliver backordered goods to them. Disadvantages of BackordersĪ key problem with backorders is that a business is losing sales to its competitors. If customers want to have their orders filled at once, then they will be more likely to place orders with a firm that reports a low backorder rate. 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. Having a low backorder percentage can be a competitive advantage. This approach can be especially effective when customer demand is high. Doing so will attract customers who like low prices, and who do not mind waiting a while to obtain the ordered items. Since the presence of backorders reduces the inventory investment and holding costs of a business, this means that the firm could pass these savings through to its customers. The result is a low working capital investment in the business, which makes it easier to operate with a minimal investment. Instead, they wait for customer orders to arrive, take their money, and then produce the goods. The main advantage of backorders is that they allow a business to invest less in inventory. Instead, the backorder is recorded within the firm’s order entry system, which is not related to the accounting system. If customers make no cash payments up-front, then there is no accounting transaction to record. ![]() Once the backordered item has been delivered to the customer, the liability is debited (to clear it from the books), and a credit is used to record a sale. When a customer places an order that is placed on backorder, any payment made by the customer is recorded by the seller as a liability. 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. However, this requires a major investment in inventory, and may result in write-offs related to obsolete goods. ![]() 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. If not, the back order is cancelled.īack orders are heavily influenced by the inventory stocking policies of a business. Another related metric is the average number of days that a customer must wait before back orders can be filled.Ī 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. The proportion of customer orders that are on back order is a common customer service metric. A back order is a customer order which the supplier cannot currently ship, but expects to ship at a later date.
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