Explanation:
Every company has limited resources to perform its activities. Under this framework, it is possible to receive customer orders that exceed existing capacity in some periods. This situation can result from either inadequate inventory management or an outstanding demand. Although the company might see this situation like a healthy signal of commercial success, it implies risks.Example:
Carty Inc. is a firm that manufactures and markets Carty, a brand of women's shoes. At Christmas time, many women tend to purchase additional shoes. They want to buy new shoes for themselves but also for their friends and relatives. From January to November, Carty Inc receives an average of 1,500 pairs of shoes ordered per month. But in December, the number can go as far as 3,000 pairs. Since the productive capacity is only 2,500 pairs per month, the company used to have severe conflicts to satisfy demand at Christmas season. Many customers were unhappy and tried other brands. In order to solve this issue, the firm decided to produce in advance part of the expected demand for December. The most popular items are now over-produced and stocked during September, October and November. In this way, the firm now can fulfill around 95% of the required items in December thanks to a successful backorder management strategy.
In a nutshell:
- A backorder is an order for a good or service that cannot be filled immediately because of a lack of available supply.
- Backorders give insight into a company's inventory management. A manageable backorder with a short turnaround is a net positive, but a large backorder with longer wait times can be problematic.
- Companies with manageable backorders tend to have high demand, while those that can't keep up may lose customers.
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