Backordering is the practice of accepting orders for items that are currently out of stock but expected to become available within a reasonable timeframe. In materials management, it serves as a middle ground between turning away demand entirely and holding excess inventory. Rather than marking an item as unavailable, a company commits to fulfilling the order once new stock arrives, keeping the sale alive while managing the gap between supply and demand.
How Backordering Works
The process begins when inventory for a particular item hits zero (or drops below the quantity needed to fill incoming orders). Instead of refusing the order, the company logs it as a backorder, a distinct category from a standard completed sale. On the company’s books, the transaction stays in a separate status so that if the customer cancels or the stock never materializes, there’s no need to reverse and reconcile a recorded sale.
From there, the company needs to handle several things that a normal order doesn’t require: notifying the buyer that the item is backordered, communicating when they’ll be charged, and providing an estimated delivery date. A company’s total backlog of these orders is typically tracked as a dollar figure or by the number of units on hold, giving materials managers a real-time picture of unmet demand.
Backorder vs. Out of Stock
These two terms describe different decisions, not the same situation. An out-of-stock item is simply unavailable, and the customer walks away empty-handed. A backordered item is also unavailable right now, but the company is making a promise: we expect to get this, and we’ll ship it to you when we do.
That promise carries risk. If the company ultimately can’t fulfill the backordered item, the customer’s frustration tends to be worse than if they’d been told “out of stock” from the start. They waited, they planned around the expected delivery, and now they have nothing. This is why the accounting treatment differs too. Backorders aren’t booked as completed sales precisely because the risk of cancellation or non-fulfillment is higher than a normal transaction.
What Causes Backorders
The most common trigger is a demand spike that outpaces available inventory. Seasonal surges are a classic example. If a company enters its peak quarter (say, Q4 for consumer goods) without enough buffer stock, orders quickly exceed supply. The Association for Supply Chain Management notes that accepting backorders during a seasonal spike without preparation leads to “sleepless nights, upset customers and uncertain results.”
Beyond demand surges, several other factors create backorder situations:
- Inaccurate demand forecasting. If projected sales underestimate actual demand, the company orders too little from suppliers and runs out before the next shipment arrives.
- Long or unpredictable supplier lead times. When the gap between placing a purchase order and receiving goods is weeks or months, any disruption in that chain creates a stockout.
- Supplier capacity limits. Even if you place an urgent reorder, your supplier may not be able to ramp up production fast enough to meet the spike. Whether they can legitimately respond to sudden demand shifts is a critical question most companies don’t ask until the shortage has already hit.
- Safety stock set too low. Companies that run lean inventories to reduce carrying costs accept a higher probability of stockouts, and therefore backorders, as a tradeoff.
The Costs of Backordering
Backorder costs go well beyond the obvious. Investopedia breaks them into three categories: direct, indirect, and ambiguous. Direct costs include expedited shipping fees to rush delayed orders out the door once stock arrives, plus the extra customer service labor needed to handle status inquiries and complaints. Indirect costs show up as lost future business when frustrated customers take their next order to a competitor.
There are also accounting costs. Under standard accrual accounting, revenue and expenses are recorded when recognized. But because backorders carry a higher cancellation risk, companies often need alternative accounting methods to handle them, which adds administrative overhead. The combination of special shipping terms, additional handling, increased service demands, and order cancellations can meaningfully erode profit margins on backordered items, sometimes turning what looked like a sale into a net loss.
A useful framework for understanding these costs is friction analysis, which maps every direct, indirect, and ambiguous expense associated with filling a delayed order. This gives materials managers a realistic picture of what backorders actually cost, rather than treating them as ordinary sales that just shipped late.
How to Reduce Backorder Frequency
The most effective lever is setting accurate reorder points, the inventory level at which a new purchase order is automatically triggered. Get this number right and new stock arrives before the old stock runs out. Get it wrong and you’re constantly playing catch-up. Reorder points depend on your supplier’s lead time, your average daily usage rate, and how much safety stock you carry as a buffer.
Automating these calculations removes human guesswork. Modern inventory management systems can monitor stock levels in real time, trigger reorders automatically, and route purchase orders through customized approval workflows so nothing gets stuck on someone’s desk. The goal is to make restocking a system-driven process rather than a reactive scramble.
Supplier relationships matter just as much as internal systems. Materials managers should know which suppliers need the least lead time and what information those suppliers need from you to respond to demand shifts quickly. Having that conversation before a crisis hits, not during one, is the difference between a manageable backorder situation and a prolonged stockout. Ask suppliers directly: what would you need from us to cut your response time in half?
For companies that experience seasonal demand patterns, planning for backorder risk should start well before the peak period. Building additional safety stock ahead of predictable surges, diversifying suppliers for critical items, and pre-negotiating expedited shipping rates all reduce the severity of backorders when they do occur.
Measuring Backorder Performance
The standard metric is backorder rate, expressed as the percentage of total orders (or total sales dollars) that couldn’t be filled from available stock. In academic inventory management models, a well-managed operation might target an annual sales backordered rate around 1.4%, meaning roughly 98.6% of demand is met from on-hand inventory.
Your acceptable backorder rate depends on your industry, your margins, and your customers’ tolerance for delays. A company selling commodity products with many competitors needs a lower backorder rate than a manufacturer of specialized industrial components where buyers have fewer alternatives. Tracking this metric over time reveals whether your inventory planning is improving or whether stockouts are becoming a recurring problem.
Legal Requirements for Backorders
In the United States, the FTC’s Mail, Internet, or Telephone Order Merchandise Rule sets clear expectations. Originally issued in 1975 and updated to cover online sales, the rule requires sellers to have a reasonable basis for expecting they can ship within the advertised timeframe. If no timeframe is stated, the default expectation is 30 days.
When a seller can’t meet that shipping promise, they’re required to notify the buyer about the delay and either obtain the buyer’s consent to wait longer or issue a full refund for the unshipped merchandise. This means backordering isn’t just an internal inventory decision. It creates a legal obligation to communicate proactively and give customers a clear exit if the delay is unacceptable.