What Are Backorder Costs And Why Are They Important?

  Mike Bachara   |     Jun 17, 2022

backorder costs social

When an item is on backorder, it means that the vendor is out of a certain item but expects to have it back in stock and delivered by a certain date. Backorder rate is the percentage of orders that cannot be delivered by the original date. 

Chances are you are familiar with backorders for two reasons. The first is when one of your vendors tells you that parts that you ordered are on backorder. The second is when you must tell a customer that the item they need is one backorder. 

When your customer is told that a part is on backorder, they may:

  • Continue with the transaction and wait for the parts arrival
  • Come back later to see if it has arrived and complete the transaction then 
  • Cancel the order and look for someone who can deliver it sooner

While backorders can be a minor issue, they can also lead to many problems, including difficult inventory management, as well as backorder costs. 

What Are Backorder Costs? 

Backorder costs are expenses you incur because you’re unable to immediately fill an order. These costs can be direct or indirect.  

Common backorder costs include: 

  • Interest expenses 
  • Decreased customer satisfaction 
  • Increased costs related to expedited shipping 
  • Overtime costs associated with having staff install the part as quickly as possible to reduce turnaround time 
  • Losing a customer to a competitor, either temporarily or permanently 

The good news is, there are steps you can take to reduce backorders. 

  1. Use The Right System 

The first thing you need to do is select an inventory management system that will help you accurately track your inventory in real time. You also want a system that can provide real time alerts and reports so that you know when it’s time to reorder. 

  1. Improve Your Forecasting 

To ensure that you have the right quantities on hand, you want to be sure you are forecasting properly. This includes using historical data to predict future demand, as well as staying up to date on what’s happening in the world. That way, you can be the first to act when there’s a sign of potential shortages in the future. 

  1. Maintain An Accurate Inventory 

Your inventory management system, low stock alerts and forecasting will only be effective if you have a well-maintained automotive parts inventory. This means doing regular reconciliation, completing annual or biennial counts and ensuring you have proper policies and procedures in place. 

Without this, you could end up making decisions using data that is incorrect and out of date. This will not only lead to back orders, but misplaced inventory, frustrated customers, lost sales and reduced profits. 

If you need help improving your parts management to reduce backorders and other common inventory problems, contact us today.

Guide to Optimizing Inventory MGMT

By Mike Bachara

Mike Bachara | Owner of Pro Count West
Mike Bachara | President Pro Count West

Our Latest Blog Updates Delivered to Your Inbox