Back Order

What is Back Order?

A back order is a retail or wholesale order that has not yet been fulfilled because the item is not currently in stock. Rather than canceling the order, the company keeps it on file and ships the product to the customer when it becomes available. The term “back order” is used to describe both the action of holding an order until it can be filled and the item itself that is on hold.

Importance of Back Order

Customer Retention: Rather than turning customers away, back ordering allows businesses to fulfill orders once stock is replenished.
Revenue Stream: Even when out of stock, businesses can continue to generate revenue by accepting back orders.
Inventory Management: It provides an indicator for the demand of certain products, helping in effective inventory planning.
Competitive Edge: Offering back order options may give a business an edge over competitors who do not offer this service.
Brand Loyalty: When a customer is willing to wait for an item to be back in stock, it often indicates a level of brand loyalty.

Types of Back Order

Manufacturer Back Order: The manufacturer is out of stock, affecting all retailers.
Retailer Back Order: The retailer is out of stock but can place an order with a manufacturer or distributor.
Partial Back Order: Some items in a multi-item order are out of stock and will be shipped separately when available.
Drop-ship Back Order: The order will be fulfilled directly by the manufacturer or a third-party supplier once the item is in stock.

Examples of Back Order

Consumer Electronics: A newly released smartphone becomes so popular that the initial stock is depleted. Customers can still place orders and wait for the next batch.
Book Releases: A bestselling book is out of stock, and customers have the option to back order to ensure they get a copy in the next print run.
Automotive Parts: A particular part is unavailable, affecting auto repair businesses. They back order the part so they can complete repairs when the item becomes available.
Seasonal Items: Items like holiday decorations may be back-ordered to meet demand during peak seasons.

Issues and Limitations of Back Order

Customer Dissatisfaction: Waiting for an item to be back in stock can frustrate customers, leading to negative reviews or canceled orders.
Cash Flow: If the delay is long, businesses might face cash flow issues as they might not be able to book the revenue until the order is fulfilled.
Inventory Challenges: Back orders can complicate inventory management, making it difficult to accurately plan for supply and demand.
Operational Inefficiency: Managing back orders can be time-consuming and may require additional resources.
Loss of Business: If competitors have ready stock, customers might cancel back orders and make their purchase elsewhere.

Understanding the dynamics of back ordering is essential for businesses to effectively manage customer expectations, inventory, and revenue streams.