The Backorder Analysis

Why didn’t you have the part in stock?

By Ron Slee

The primary question for a parts business is one that relates to inventory. What parts do we have to carry in inventory for our customers?

In every survey I have ever seen, parts availability is the number one requirement for customers in the capital goods industries.

Most of you have been through the theory of inventory management. Order points and order quantities and lead times and EOQs. Anyone who has managed an inventory has heard these terms forever. Most of your business systems provide an inventory package.

But one of the things I find interesting is not many people in the parts business understand inventory control theory. Of course you can ask the question, “Why should they?” But that puts your complete reliance for inventory performance on someone or something else.

And does that make you innocent? Not at all. You still have to provide the parts to your customers. Not only that, but you have to supply them well enough so they’ll keep coming back to you for parts. So shouldn’t you know the theory of inventory management? Of course you should.

Most Important Part

Those of you who have followed this column have heard me say: “The only part that matters is the one you don’t have.” That is when you can prove to the customer your value by finding and obtaining the parts you don’t have on the same day the customer orders them. But again, let’s tie it back to the original question: Why didn’t you have the part in stock?

Of course there are times you haven’t had enough demand to warrant stocking a part and it isn’t something for which you want to provide protective inventory. But I am addressing here the parts that have reached sufficient demand to warrant having them in stock. Why do you have a situation where you don’t have those parts in stock?

Backorder Analysis

That requires some work. We have to use a little known study called the “Backorder Analysis.” As the name implies, we need to do some work to determine why this stock part was not in the bin when the customer wanted to buy it. To determine this, we need to explore what causes backorders and what remedies there might be to minimize having backorders in the first place.

The main causes of backorders are:

  • Order not promptly placed
  • Warehouse discrepancies
  • Human error
  • Factory shortages
  • Inaccurate order points
  • Abnormal demand
  • Customer convenience.

Order not promptly placed: Depending on your vendor “order cycle,” stock orders are placed to your vendors daily, weekly, or some other time period. The part is put onto a suggested order which then is normally reviewed by an individual in the parts department and a decision made as to placing the order or not. If the decision is made to delay placing a stock order, that might be the cause of a backorder.

I strongly recommend dealers never take a part number off of a suggested order. Either the rules you have set to manage the inventory work or they don’t. We don’t know what is wrong when people change a result—the rule or the decision made. Changes can be an ongoing cause of a backorder.

Warehouse discrepancies: A discrepancy occurs when the quantity on hand in the computer is not the same as the quantity on hand in the bin. The first and most prominent cause of this discrepancy is from a physical count itself. The U.S. Navy performed a study on its discrepancies during the 1990s and found this to be the major cause of its problem. This is why I recommend a physical inventory is taken when a part reaches zero on hand or is being received.

Human error: The part is either in the bin location or in the warehouse in another location, but somehow the person picking the order didn’t find it. We will always have human error—the trick is to minimize it.

Factory shortages: This is the reason for a lot of backorders and one over which the dealer has little control. We can mitigate it by recognizing early when the vendor is running out of a part, but other than that we cannot control the vendor performance on stock orders.

Inaccurate order points: There are several considerations for this cause of a backorder. The items making up the order point are not current or accurate. There is a seasonal upswing in demand. Or the delivery cycle from the suppliers has changed and we haven’t adjusted our rules. All of these situations can be identified and corrected.

Abnormal demand: This is an ongoing dilemma. The customer places an order in a quantity that is clearly not normal. For instance, you sell a part 12 times in a year and a customer orders a quantity of six at one time. What are they doing? That’s the question that needs to be asked of the customer. Then together, between the customer and your customer service personnel, a solution can be found.

Customer convenience: Finally is the case when it is more convenient for the customer that we place a part on order with the supplier even when we have the part on hand.

This might be when the customer orders six items and we only have two of them on hand. That is the list of the most common causes of backorders. What is the cause of most of your backorders? In many parts businesses the answer is unknown. It shouldn’t be. You should know the causes of the backorders so you can take action to correct the situation or mitigate it and minimize the impact. Customers tell us they need us to have good parts availability. Sure, “good” is a moving target, but we can and should do our “best” at providing parts. After all, that is our goal.

The time is now.


Ron Slee is the founder of R.J. Slee & Associates in Rancho Mirage, California, a consulting firm that specializes in dealership operations. He also operates Quest, Learning Centers, which provides training services specializing in product support, and Insight (M&R) Institute, which operates “Dealer Twenty” Groups. He can be reached at ron@rjslee.com.