What it is:
A back order is an order that cannot be filled in the usual time expected.
How it works (Example):
John Doe purchases 10 tractors from a tractor dealer. The retailer has four on hand to ship; it has to wait for the factory to make the rest, which could take three or four months. The six missing tractors are back orders, and John Doe will receive them later.
Why it Matters:
Many companies cannot easily predict how products will move. Though back orders can be an occasional side-effect of just-in-time inventory and other efforts at efficient operations, back orders are usually not great for customer relations -- particularly during the holidays or for products that are "hot." Some companies measure their back order activity as part of their efforts to analyze inventory and purchasing. After all, a back order might indicate that a company has a hot product, but too many back orders can send customers into the arms of competitors.