When it comes to customer satisfaction, backorders are one of the most important metrics they use to gauge how well you’re doing as a company. No customer wants the hassle and expense of receiving the same item on the same order line multiple times just because your team can’t get their act together. Even worse, if you send an item but backorder its companion or complementary piece, you are shifting the burden of inventory to the customer.
Backorders can slow down or even halt production; they can cause issues for your customers and issues down the line for their customers. You don’t want to be identified as the cause of late deliveries or production shutdowns at your customers’ sites, so it makes sense to keep an eye on backorders.
What Are Backorders?
Backorders are not simply late deliveries, although sometimes people will say, “It’s on backorder” when asked if an item is in stock. A company’s backorder rate is the percentage of orders that cannot be delivered at the scheduled time but that will be delivered at a later date. Some companies don’t count an order if they have made a partial shipment, but to your customer, it’s a backorder. Any unmet scheduled delivery should be included in the backorder rate calculation.
How to Measure Backorders
To calculate the backorder rate, divide the number of undeliverable orders by the total number of orders and multiply the result by 100. If your customers typically order items with multiple delivery schedules, use lines in place of orders.
Before you give up in despair at the idea of counting orders, you should know that the QAD Operational Metrics capability includes backorders as one of its core KPIs, so all the work, including graphing results, is done for you automatically.
Best Practices to Decrease the Number of Backorders
Improving forecast accuracy is one way to reduce the number of backorders, but in many cases, it is not easy to do. Implementing a supply chain planning system that has multiple built-in forecasting algorithms will help. Supply Chain Planning (SCP) systems use historical demand and the algorithm that best fits the item’s unique usage pattern to predict future demand. The SCP system should also be able to incorporate marketing promotions and market intelligence from the sales force to further refine the forecast.
Using Available to Promise (ATP) functionality when entering orders can help reduce backorders as well. ATP uses existing inventory and time-phased supply and demand information to predict when the required inventory to fulfill an order will become available. Barring unforeseen circumstances, the company should be able to fill the order on its scheduled date.
Another technique in certain circumstances may be to consign inventory to the customer’s facility. The customer draws from the on-hand stock as needed and the company can replenish the demand as the on-hand balance reaches a predetermined reorder point.
Forecast accuracy reduces backorders by helping to ensure that the company makes or buys the right amount of inventory to meet demand. ATP helps by calculating reasonable ship dates for orders during the order entry process, so the customer knows from the start what the expected ship date will be. Consigned inventory removes the need to worry about delivering on order lines because the customer has ready access to the inventory as they need it. These are all good techniques for reducing backorders.
Regardless of the methods you choose to decrease backorders, inventory accuracy and visibility should be the backbone of your inventory strategy. Use the techniques mentioned in our previous blog to ensure that your inventory is accurate to the high-ninety percentile range, or nothing will prevent backorders.
What challenges are you finding most difficult when it comes to managing backorders? Let us know in the comments section below.