Back Order Versus Backlog
You Want One of These but Not the Other One
The supply chain definitions for Back Order and Backlog are varied.
But the general rule of thumb is that the bigger the backlog, the better.
Optimized supply chain depends on it.
Backlog: Your company's backlog is the aggregate of the orders that your customers have sent you that you have not shipped.
Ideally, this is a large number because you have many customers who have given you orders that they want shipped downstream. I.e. a customer wants their holiday order shipped to them on November 1, so they send you an order on September 1 (to factor in lead times).
From September 1 until October 31, that order is part of your backlog.
Back Orders: Your company's back orders are the orders you haven’t shipped because you’re late.
In the example above, if you don’t ship that customer order on November 1 – on November 2 it becomes a back order. And remains on your back order report until you ship it.
Ironically, that order remains on your backlog. So back orders are also backlog, which can be confusing - since backlog is good and back orders are bad.
Sometimes people use the term "backlog" in their personal or work lives to mean that they have "so much to do." And that can give it a negative connotation.
But if someone is complaining that they have a backlog of work to get to -- that means that they have work to do. That - in a supply chain sense - is a good thing.
Even though you might feel overwhelmed, it's because you have so much to do (i.e. to ship or, in other words, to generate revenue). A healthy backlog - even though it might feel stressful - is a good thing, and the bigger the backlog, the better.
It's when when - in that example - deadlines start to get missed, that the backlog turns into back orders. Again, back orders are bad.
Optimized supply chain - at least my go-to definition of optimized supply chain - is getting your customers what they want, when they want it and spending as little money as possible getting that done.
Backlog is the first part of that definition. Getting your customers what they want.
By having customers place orders, ergo letting you know what they want, your backlog grows more robust. You're filling your sales pipeline.
Maybe that's a good way to remember what a backlog is. A backlog is your sales pipeline. Logs and pipes look the same, don't they?
Maybe it's just easier to remember that backlogs are good.
Back orders are what happens when you don't take care of the second part of that definition - i.e. the "when they want it" part.
If you're not supplying your customers what they want - when they want it - you're going to find yourself in a back order situation. Bad.
But why are back orders bad? If you end up shipping the order, you realize the revenue - so what's the big deal? The big deal is that:
- There's no guarantee that your customer will keep the order with you. How many times have you canceled an order with a retailer because it didn't get to you when you needed it? Exactly. By carrying back orders, you run the risk of leaving revenue on the table.
- Back orders can leave a bad taste in your customer's mouth. And the next time they need a supplier, they may not come to you.
Remember, optimizing your supply chain means getting your customers what they want, when they want it (and spending as little money as possible getting that done).
And the only real repeatable way to make sure you're getting your customers what they want, when they want it - is to know when they want it and then make sure that the "when" aligns with what you're able to do.
Make sure your customers understand your lead times - and, more importantly, make sure you understand your own lead times.
Keep your back orders down and your backlog up - and you'll be on your way to optimizing your supply chain.