What is a pending order? – definition | Meaning | Example
What does backorder mean?
Every company has limited resources to carry out its activities. Under this framework, it is possible to receive customer orders that exceed existing capacity in some periods. This situation may be due to improper inventory management or pending demand. While the company may view this situation as a healthy sign of business success, it involves risks.
Unsatisfied customers have to wait longer than usual to receive the required product or service and therefore some of them may decide to cancel their orders. Poor customer reviews sometimes lower the purchase intent of other potential buyers. In this regard, all organizations must carefully strike a balance between high capacity utilization and low backorder rate. What Is A Backorder?
Carty Inc. is a company that manufactures and markets Carty, a brand of women’s shoes. At Christmas, many women tend to buy extra shoes. They want to buy new shoes for themselves, but also for their friends and family.
From January to November, Carty Inc receives an average of 1,500 pairs of shoes ordered per month. But in December, the number can go up to 3,000 pairs. Since the production capacity is only 2,500 pairs per month, the company used to have severe conflicts to meet the demand at Christmas time.
Many customers were not happy and tried other brands. To solve this problem, the firm decided to produce part of the demand expected for December in advance. The most popular items are now overproduced and stocked through September, October, and November.
In this way, the firm can now fulfill around 95% of the required items in December thanks to a successful backorder management strategy.