What Is a Backorder?

Backorders are a natural part of the modern supply chains, happening for a number of reasons, including supplier delays, unexpected spikes in sales and logistical disruptions.

While customers most often look at backorders as inconveniences, they often signal strong product demand rather than operational failure.

Defining a Backorder

The most common mistake people make is that they often interchangeably use terms backordered and out of stock, as these two concepts are actually representing very different issues.

The products that are out of stock are not only unavailable in a retailer’ inventory, but also have no confirmed timeline for when they’ll be next available to customers.

When a company has a backorder issue, on the other hand, it continues accepting orders even when an item is unavailable, as it expects new inventory to arrive within a set timeframe, therefore committing to fulfill the orders of that item once stock is replenished.

In practical terms, a backorder is a promise of future delivery rather than an indefinite shortage.

For customers, this means they can still secure the product they want without monitoring restock announcements or competing with other buyers when inventory returns. 

For businesses, backorders allow them to capture demand that would otherwise be lost to competitors.

Why Backorders Occur

Backorders are most commonly caused by a combination of factors, namely:

Unexpected Demand Surges

Sudden spikes in demand for a product are the most common reason for backorders. For example, Black Friday and Cyber Monday sales spikes, or successful marketing campaigns can outpace a retailer’s sales projections.

While this scenario creates temporary fulfillment delays, it often indicates strong market traction. 

In many cases, companies view short-term backorders as evidence that a product has gained meaningful consumer interest.

Supply Chain Disruptions

Another big issue has all to do with the volatility of the global supply chain, which has increased over the past decade. 

Any disruption in materials, transportation or factory slowdowns can drastically impact the ability of suppliers to deliver products, so retailers are often forced to place those products in backorders until shipments arrive.

Lean Inventory Strategies

Many retailers will intentionally have less products in their inventory, most usually in order to reduce storage cost or to improve the company’s cash flow.

This has led to a Just-in-Time inventory management approach, which relies heavily on frequent supplier deliveries and maintaining a minimal stock of products on-hand.

While this strategy can significantly lower overhead costs, it also leaves little margin for error. Even minor delays in production or transportation can temporarily exhaust inventory, leading to backorders.

How Backorders Affect Supply Chains

The relationship between supply chains and backorders is a two-way street, as increases in purchase orders to suppliers trigger something called the bullwhip effect.

This means that even small changes in consumer demand can cause large fluctuations in production further up the supply chain. If the companies overcorret and consumer demand slows down, this results in excess inventory.

Backorders also tend to increase operational costs. Businesses may resort to expedited shipping, emergency production runs, or alternative suppliers in order to reduce fulfillment delays. 

These reactive measures often carry significantly higher costs than standard supply chain operations.

Backorders also naturally impact consumer sentiment, as customers are increasingly more accustomed to same-day or two-day deliveries of products, so frequent backorders can lead to the loss of consumer confidence in a retailer.

Finally, backorders can distort demand forecasting models. If companies misinterpret backordered purchases as sustained demand rather than temporary shortages, future inventory planning may become inaccurate.

The Strategic Advantages of Backorders

While backorders definitely introduce challenges to businesses and consumers, they can also be advantageous if managed correctly.

Companies that accept backorders have the benefit of retained revenue, allowing them to capture sales immediately rather than losing them if they refuse to accept orders on sold out products.

Backorders also provide valuable insights into customer preferences. When specific products consistently enter backorder status, businesses gain clear signals about demand patterns. 

Another advantage involves inventory carrying costs. Warehousing products for extended periods can be expensive, particularly for companies with large product catalogs. Backorders help reduce excess inventory by aligning incoming stock with confirmed customer demand.

The Risks of Poor Backorder Management

As we noted above, poor backorder management can lead to negative customer experiences, potentially leading to frustration and people looking at your competitors that can provide them with timely deliveries.

This is further exacerbated if you aren’t transparent about backorders, as customers can feel misled about delivery timelines, making them significantly less likely to return for future purchases.

Backorders can also introduce operational complexity. Managing partially fulfilled orders, tracking delayed shipments, and coordinating supplier deliveries requires sophisticated inventory management software systems.

Many businesses rely on enterprise resource planning (ERP) platforms such as NetSuite or similar tools to track order status and maintain accurate inventory records.

Final Words

As you can see, backorders can be both a burden or a strategic advantage, but they require a methodical approach and transparency if they are to be used to your advantage.

If you clearly explain product delays and provide users with accurate timelines, you can maintain customer loyalty even in this increasingly complex and volatile global supply chain.