Your sales backlog is a good thing. Your sales back orders are a bad thing. If you’re not convinced of those facts, here’s an explanation.
If you have back orders, that means that your customers are waiting for you to ship the orders. Another way to put that is: Your customers are waiting to pay you money.
Driving your back orders to zero is a great way to optimize revenue. The good news is that there are really only three things you need to do to drive your back orders to zero and keep them there.
- Customer Demand Management
- Internal Throughput Management
- Supplier Lead Time Management
It’s pretty basic, really. What do your customers want, when do they want it — and how long does it take me to deliver it to them?
And while you may not have one hundred percent control over those three drivers, with enough practice, you can understand them enough to prevent back orders.
Customer Demand Management
Unless you’re Apple or the National Football League, you probably can’t tell your customers what you’re going to give them and when you’re going to give it. The rest of us have to figure out how to deliver what our customers want when our customers want it.
Your customers send you plenty of signals to let you know what they want and when they want it. One of those signals is an order. Those are the best signals because that tells you that your customer is willing to give you money in exchange for your product.
Other signals include forecasts (which are typically non-binding) and other business intelligence that can be gleaned from emails, phone calls, and face-to-face meetings.
You can also work to predict your customer demand by analyzing historic actual shipments, the competitive landscape, seasonality and any marketing or sales promotions that will impact demand.
Your Customer Isn’t Always Right
In contrast to the old adage about your customer’s infallibility, your customer isn’t always right. And, under the right circumstances, they will likely appreciate your telling them that.
If your customer places an order and they want you to ship that order in three days but you know your lead time is three weeks, this is an opportunity to let them know that they’ve put the wrong ship date on their order.
If you don’t work with your customer so that they know your lead times, you’re asking for back orders. In the above example, if you accept your customer’s order with the “ship it in three days” request date -and you know you can’t ship it for three weeks — that order will become a back order when that third day rolls around until you ship it.
If you had worked with your customer so that they understood your lead times, your customer would likely have placed the order with the three-week lead time. They would have done that in one of two ways, they would have accepted your push-out to three weeks or they would have placed their purchase order two weeks and four days earlier. Your customers want to understand their suppliers and you can manage their expectations by helping them to manage their demand.
Internal Throughput Management
You know that Dave in your receiving department has a delivery from one of your suppliers. And you know that Wendy in customer service has an order from a customer who wants what Dave just received.
Do you know how long it will take Scott in shipping to get that product out the door and fulfill Wendy’s order?
The great thing about Internal Throughput Management is that it’s the back order driver that you have the most control over.
If you don’t know how long it takes Dave to put that delivery to stock, so that Wendy can release the order for Scott to ship — then you should.
Do several time studies to measure your internal throughput time. You can put Post-It’s up on your office wall or map it out on a whiteboard — but understand every minute, every second, of your process.
Having that knowledge at your fingertips helps eliminate back orders because you will know exactly when you can ship a product, even one that’s sitting on one of your warehouse shelves.
Don’t promise to ship something tomorrow if you know that it takes you 48 hours to ship an order out the door.
And, of course, the next step is shaving seconds, then minutes, then hours and then days off your internal throughput time.
Supplier Lead Time Management
If your customer orders Product A from you, but you don’t have Product A in stock — then you know you need to get some Product A. Let’s say Product A comes from Supplier X. How long does it take for you to get Product A from Supplier X?
That’s your supplier lead time. Supplier X might tell you their lead time is six weeks but you’ve been ordering Product A from them for long enough to know that it really takes eight weeks for Product A to show up.
Managing that lead time is critical to eliminating customer back orders. If your customer wants Product A in five weeks but you know it’ll take eight weeks for you to get it, you need to manage your customer expectations (and help them place orders on time) and work with Supplier X to improve that lead time.
Why does it take eight weeks for you to receive Product A?
- One week: Supplier acquires raw materials
- Two weeks: Supplier makes Product A
- One week: Supplier inspects Product A
- One week: Freight forwarder prepares shipping/customs documentation
- Three weeks: Transit to your Dave, at your door
Your customer back order reduction can benefit from knowing your supplier’s processes. Would your customers benefit from a six-week lead time instead of an eight-week lead time? Would that two-week reduction help them manage their inventory and place orders in a more timely manner?
How can you reduce your supplier lead time by two weeks? Are there raw materials that they can stock that would save them a week? Does it really take one week to inspect Product A or is most of that time spent sitting in the queue? Can you do in-process inspections that would drive manufacturing and inspection efficiencies? Can the freight forwarder prepare documentation in parallel with other manufacturing and shipping activity?
Sometimes all it needs is a critical eye to find the low hanging fruit to pluck out of your supplier’s lead times.
And by optimizing your own internal lead times and working with your customers on their demand, you can work to drive your back orders to zero.
Remember, back orders are a result of orders not shipping on time — and orders don’t ship on time when demand and lead times aren’t managed correctly.