A back order is an order which cannot be filled at the time it is submitted because the stock to fill the order is not available. Companies usually try to avoid back orders because customers generally want their orders filled immediately, although they may be willing to wait in some circumstances. However, companies also cannot always predict how orders will move, which can be make it difficult to make determinations about what to stock. Thus, the company constantly walks a tightrope when it comes to inventory management.
Typically when a customer places an order for something which a company knows it does not have in stock, it will alert the customer to the fact that the item is back ordered. The customer has the option of canceling the order without penalty or waiting for the items to arrive, and typically an estimated time of shipping is provided to help the customer make this decision. If the customer is willing to wait, his or her order will be filled when the stock arrives.
Sometimes items are back ordered for a period longer than expected. In these situations, companies may waive shipping costs or offer other compensations to customers as a reward for their patience during the back order period. This is also designed to retain customer loyalty, so that customers will be inclined to frequent that company again despite the back order issue because they remember being treated well.
For companies, back orders can be costly. In addition to being associated with costs such as administrative expenses, back orders can also lead to a bad reputation, which can cause the company to lose future orders from customers. Even when back orders are beyond the control of the company, as when a manufacturer limits supplies of a popular item and a company orders as much as it can but cannot keep up with the demand, customers may view the company unfavorably. Especially if a customer repeatedly encounters a back order for an item, that customer may take business elsewhere.
Inventory management requires keeping enough goods in stock that a company can serve the needs of its customers, without overstocking. Overstocking requires storage space for the excess, which costs money. It can also force companies to return items at the end of the reason, which is costly, and when goods are not returnable, the company may be forced to sell them at a discount to get them out of stock, potentially taking a loss. For this reason, companies try to balance their stock to avoid a back order situation while also keeping the amount of items in stock reasonable.