DEFINITION of Backorder
A backorder is an order for a good or service that cannot be filled at the current time due to a lack of available supply. The item might not be held in the company's available inventory but could still be in production. Or, the company might need to still manufacture more of the product. The nature of the backorder and the number of items on backorder will affect the amount of time it will take before the customer can eventually receive the ordered product. The higher the number of items backordered, the higher the demand for the item.
BREAKING DOWN Backorder
Backorders are an important factor in inventory management analysis. If a company consistently sees items in backorder, then this could be taken as a signal that the company is running too lean and that it is losing out on business by not providing the products demanded by its customers. When an item is on backorder, a customer might be looking elsewhere for a substitute product, especially if the expected wait time until the product becomes available is long. This can provide an opportunity for once loyal customers to try other companies' products and potentially switch. Difficulties with proper inventory management can lead to eventual loss of market share as customers become frustrated with the company's lack of product availability.