Understanding Backorders: Definition, Impacts, and Best Practices

Key takeaways
* A backorder occurs when a customer orders a product that is not available for immediate delivery but is expected to be restocked.
* Backorders can signal strong demand, reduce inventory carrying costs, and create marketing buzz—but frequent backorders may indicate operational problems and risk customer loss.
* Effective handling requires clear customer communication, accurate accounting, and improved supply-chain and demand forecasting.

What is a backorder?

A backorder is a customer order that cannot be fulfilled immediately because the item is out of stock, but the seller expects to obtain and deliver it later. Unlike a simple out-of-stock status, a backordered item can still be ordered; shipment is deferred until inventory is replenished.

How backorders reflect supply and demand

• Demand signal: High numbers of backorders usually mean demand exceeds current supply for that item.
• Inventory insight: The volume and fulfillment time for backorders reveal how well a business manages inventory and replenishment.
• Strategic trade-off: Firms may intentionally keep low on-hand inventory and accept backorders to lower storage costs while meeting demand through incoming supply.

Accounting and record-keeping

• Recording: Sales tied to backorders are generally recorded as pending until goods are shipped. Companies should track backorders by units and/or dollar value.
• Cancellations: If a customer cancels a backorder before fulfillment, the pending sale is removed; no completed sale is recognized.
• Customer notifications: Businesses should notify customers when orders are placed on backorder and provide expected delivery windows. Ongoing updates reduce cancellations and customer dissatisfaction.

Benefits of allowing backorders

• Lower inventory costs: Maintaining minimal stock reduces warehousing and capital tied up in inventory.
• Meets surge demand: Backorders let companies capture sales even when supply is temporarily constrained.
• Marketing effect: Scarcity or “sold out” status can signal popularity and increase perceived value for some consumers.

Risks and operational challenges

• Lost sales and churn: Long wait times can push customers to competitors, damaging market share and loyalty.
• Administrative burden: Managing backorders requires more coordination across purchasing, logistics, customer service, and accounting.
• Signal of inefficiency: Frequent or prolonged backorders may indicate forecasting, production, or supply-chain weaknesses.
• Regulatory sensitivity: For critical goods (e.g., certain medications), expected shortages may need to be reported to regulators and publicly disclosed.

Practical best practices

1. Communicate proactively
2. Tell customers immediately when items are backordered and give realistic delivery estimates.
3. Send progress updates and offer options (e.g., wait, cancel, or choose a substitute).
4. Improve forecasting and replenishment
5. Use historical sales, pre-orders, and market signals to refine demand forecasts.
6. Shorten lead times with suppliers where possible and diversify sources to reduce disruption risk.
7. Track metrics
8. Monitor backorder rate, average fulfillment time, cancellation rate, and lost-sales estimates.
9. Treat accounting carefully
10. Record backorders separately from completed sales and reconcile when goods ship.
11. Offer alternatives
12. Suggest substitutes, expedited restock options, or partial shipments to retain customers.

Real-world illustration

Major consumer electronics launches routinely generate backorders. Companies often note that shipments will be sent when units become available and flag longer delivery windows on product pages. These backorders reflect both genuine demand surges and the practical limits of production and logistics.

Frequently asked questions

Q: How long does a backorder take to fulfill?
A: There’s no standard timeframe. Fulfillment depends on supplier lead times, production capacity, and logistics; companies should provide their best estimate and update it as circumstances change.

Q: Is a backorder the same as out-of-stock?
A: No. “Out of stock” means the item isn’t available and may not be offered for purchase. A backorder means customers can still place orders but must wait for later fulfillment.

Q: Why do backorders happen?
A: Causes include unexpected demand spikes, production or supplier delays, shipping disruptions, or inaccurate inventory forecasting.

Q: Are backorders bad for business?
A: Not necessarily. Short-term backorders can be a useful tool to manage inventory and capitalize on demand. However, persistent or poorly managed backorders harm customer relationships and may indicate deeper operational issues.

Bottom line

Backorders are a common inventory phenomenon that can be managed to advantage or can expose weaknesses. When handled well—through clear communication, accurate accounting, and improved supply-chain practices—backorders let businesses capture demand while minimizing inventory costs. Left unmanaged, they risk lost sales, strained customer relationships, and operational inefficiency.