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Backorder costs with Easy Example
Importance:
Most companies face a problem when there is more demand than supply of their goods and services. However, backorder situations can indicate poor inventory management or purchasing behavior, and after considering the tangible and intangible costs of backorders, some times it’s just cheaper in the long run to make more product and carry more inventory. For these reasons, many companies measure the success of their customer service in part by tracking the percentage of these orders. Companies will accept backorders for items currently unavailable if they are fairly certain the merchandise can be replenished. In this case, no item will be backordered for future fulfillment, as receipt of new inventory is not a certainty and would lead to dissatisfied customers. Flipkart sells Chinese brand Xiami phones On registration basis and it receives an unprecedented number of orders 50000 units in four hours. It only has 40000 units in its warehouse and will need some weeks to make the missing 10000 units available.These units are said to be backordered.
Backorder costs:
Although it’s nice to have a product that is so popular that a waiting list forms, there are some real costs associated with not having products on hand when customers want them. For example if Xiami is unable to supply the required number of products timely then they may lose many customers because meanwhile customers may switch over to another similar brand. For the purpose of producing the needed number of goods if Xiami is ready to follow overtime production daily until the supply reaches demand then they may have to pay higher wages to labourers and there is a risk that the suppliers of raw materials may demand much price for their products. Recommended Articles
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