What it means
Backorders sit between two other outcomes. On one side is a stockout where the customer simply buys elsewhere, and on the other is a normal shipment, so the backorder is the middle case where the customer stays but waits.
They are usually the visible symptom of a forecasting or lead time problem rather than a random event. Demand ran ahead of plan, a supplier slipped, or the reorder point was set too low for the replenishment time actually being achieved.
The financial damage is easy to understate. Beyond the lost margin on orders that customers eventually cancel, there is expedited freight, extra picking and packing on split shipments, and support time spent answering questions about where an order has got to.
Retailers track backorder rate and fill rate as a pair, since one is essentially the mirror image of the other. Fill rate is the share of demand met from stock on the first attempt, and it is the number most supply agreements are written around.
The fix is rarely just holding more stock, because inventory ties up cash and risks obsolescence. Safety stock, shorter supplier lead times and better demand sensing all compete for the same money, and the right mix depends on how patient the customer really is.
In practice
Real-world examples
Example 1
A garden centre chain runs out of a bestselling barbecue in the first hot week of May and backorders 900 units. Stock arrives four weeks later, by which point a third of the customers have cancelled and bought from a competitor.
Example 2
An industrial supplier keeps a rare valve permanently on backorder because the manufacturer runs it once a quarter. Customers accept the wait since no alternative exists, so the backorder is a normal part of the business rather than a failure.
Example 3
An electronics brand launches a new headphone and deliberately accepts backorders rather than pausing sales, using the size of the backlog to justify a larger second production run to its contract manufacturer.
Think of it
A backorder is like putting your name on a waiting list at a popular restaurant. The kitchen is out of soup right now, but the chef is making a fresh pot, and your table is guaranteed to get a bowl as soon as it is ready.
Formula
Calculation
Backorder rate = units backordered / units ordered
Fill rate = 1 - backorder rate
An online parts retailer takes orders for 48,000 units in a quarter and cannot ship 3,600 of them from stock. The backorder rate is 3,600 / 48,000 = 7.5%, so the fill rate is 100% - 7.5% = 92.5%.
Costing that out, 15% of the backordered units are cancelled before they can be shipped: 3,600 x 15% = 540 units, and at a contribution margin of $28 each that is 540 x $28 = $15,120 of lost profit. The remaining 3,600 - 540 = 3,060 units ship late using expedited freight at $6 per unit, adding 3,060 x $6 = $18,360. The quarter's backorders therefore cost $15,120 + $18,360 = $33,480 before any allowance for damage to customer goodwill.Case study
Seen in the real world
The following is a fictional, illustrative scenario. Marlowe Pet Feeds, an invented maker of specialist animal nutrition, sold a premium line that depended on a single ingredient from one overseas supplier. When the supplier's plant shut for four weeks, the company took 6,400 units of backorders rather than turning customers away.
Management assumed patient customers would wait, because the product was hard to find elsewhere. In reality 22% cancelled, which is 6,400 x 22% = 1,408 units, and at $34 of contribution each that removed 1,408 x $34 = $47,872 of profit. Worse, a survey of the cancelling customers found that 40% of them, roughly 563 people, had switched to a rival brand permanently.
In this illustrative example the lesson was about communication as much as stock. When the company later trialled telling customers an honest shipping date at the point of order and offering a 10% credit for waits beyond three weeks, cancellations on the next disruption fell to 9%.
Watch out
Common mistakes
- Counting a backorder as a completed sale in reporting, when a meaningful share of them will be cancelled before anything ships.
- Hiding the expected wait from the customer, which converts a patient buyer into an angry one and raises cancellation rates.
- Solving every backorder with more safety stock, without asking whether the real problem is supplier lead time or a bad forecast.
Questions
People also ask
Is a backorder the same as a stockout?
A stockout is having no inventory, while a backorder is a specific customer order accepted against that empty shelf and queued for later fulfilment.
Should customers be charged when they place a backorder?
Practice varies, but many businesses authorise the payment and only capture it on despatch, which is fairer and reduces refund handling.
How is a backorder different from a pre-order?
A pre-order is taken before a product has ever been released, whereas a backorder applies to an existing product that has temporarily run out.