Backorders, lost sales, and lost customers are significant costs related to customer service in the supply chain. A backorder, also known as a stockout, is defined as “an unfilled customer order or commitment…an immediate (or past due) demand against an item whose inventory is insufficient to satisfy demand.”

The financial impact of backorders can be difficult to quantify but is critical to understand. For example, when a popular item like a new smartphone model goes out of stock, customers may cancel their orders and purchase from competitors instead. This results in lost sales and potentially lost customers who may not return.

To manage these risks, businesses use various metrics. One effective measure is the percentage of orders shipped on schedule. If a company consistently ships 95% of orders on time, it suggests efficient inventory management. However, if the rate drops to 85%, it indicates a problem that could lead to increased backorders.

Safety stock, the extra inventory held to prevent stockouts, is another crucial factor. For instance, a retailer might keep an additional 10% of high-demand items in stock during peak seasons to ensure availability. This investment in safety stock helps maintain customer satisfaction and loyalty by reducing the risk of backorders.

While the costs of backorders, lost sales, and lost customers are challenging to quantify directly, they can be managed effectively using metrics like the percentage of orders shipped on schedule and strategic safety stock investments. These practices help businesses maintain service levels and customer satisfaction, ultimately protecting their bottom line.