A back order cost is a cost that occurs when an order cannot be met due to lack of inventory. This may occur due to several different factors, including forecasting errors, unexpected demand, and delays in ordering.
Monetary Costs of Back Orders
Many times a back order cost will be recorded as a penalty cost and are usually on a “per-unit” basis. These costs may include expedited shipping, over time labor rates, and increased returns.
A company may incur expedited shipping rates to satisfy customers and ensure they receive their products when promised. These costs may be significant, depending on the product size.
Workers may have to work overtime in order to ensure goods go out on time, which result in higher labor costs.
Many times a customer will neglect to inform the company that they have purchased the product elsewhere and then will return that product. Not only does the company incur the initial expedited shipping costs, they now have an overstock issue as well as the labor costs of putting that product back in the warehouse in hopes it will be sold again.
Some Back Order Costs are Intangible.
A back order cost is not always a dollar amount. It could come in the form of a disgruntled customer going to a competitor to purchase similar goods. While a customer may go to a competitor for just that one good, if the problem persists, they may go to a competitor for everything.
Solution to Back Ordering
When a warehouse management system is in place, you can see exactly what is in stock, what needs to get reordered and what products are selling at a faster rate. There is also the capability of setting maximum and minimum inventory counts to automate reordering, assuring there is never an overage or shortage of goods for customers.
To see if a warehouse management system is right for your company, contact us today at MSA Systems.