What are Backorders and How to Manage or Avoid Them?

What Is a Backorder?

A backorder is a customer order you accept for an item that is not in stock right now, with a commitment to ship it when it arrives. The order is not rejected or cancelled; it is recorded and takes its place in line for the next supply.

The difference from a plain stockout matters. In a stockout, the customer asks, hears "not available", and usually buys from a competitor. The sale is gone. With a backorder, the customer agrees to wait and the sale survives, provided it is managed clearly. A backorder is a commercial decision, not just an inventory problem.

It is also different from a pre-order, which is taken for a product that has not been launched yet. A backorder is for a product you normally sell that has temporarily run out.

This guide covers why backorders happen, when accepting them makes sense, how to manage them step by step, the invoicing and VAT implications in Saudi Arabia, how to reduce them, and the metrics worth tracking.

Why Backorders Happen

• Demand above forecast: a promotion worked better than planned, a season started early, or a large customer ordered an unusual quantity.
• Supplier delays: two weeks promised, five weeks actual. Common with imports, where sea freight, customs clearance and inland transport all stack up.
• Wrong balances: the system shows fifty units, the shelf holds twenty. The order is accepted on a false balance and becomes a backorder at picking.
• Stale reorder points: calculated a year ago and never updated after consumption rose or lead times stretched.
• Missing components: in manufacturing, one short component stops the finished product and every order tied to it.
• Deliberate policy: some companies choose not to stock expensive or slow items and buy to order. Here backorders are part of the model, not a failure.

The Impact on Your Business

The upside

• You keep the sale instead of losing it to a competitor.
• You avoid holding large stock of expensive or slow items.
• You get a clear signal of real demand to plan from.

The downside

• Customer patience: waiting once is fine; repeated waits send customers looking elsewhere.
• Extra operating cost: a second shipment for the balance, follow-up calls, sometimes expensive expedited freight.
• Invoicing complexity: partial invoices, advance payments and credit notes when orders are cancelled.
• Cancellations: the longer the wait, the more likely the customer cancels, possibly after you have already ordered from the supplier.
• Team pressure: sales chases purchasing, purchasing chases the supplier, and customer service fields the calls.

When Accepting a Backorder Makes Sense

Managing Backorders Step by Step

1. Check availability before confirming

Before a rep confirms any order, they need to see available stock: on-hand quantity minus quantities already reserved for earlier orders. Total on-hand alone is misleading because part of it may already be sold and waiting to ship.

2. Look for alternatives first

• Is the item in another warehouse or branch you can transfer from?
• Is there an equivalent item the customer would accept?
• Is a purchase order already on the way, and when will it really arrive?

3. Set a realistic date and communicate it

Build the date from the purchase order's expected arrival plus receiving, inspection, picking and delivery time, not from the supplier's promise alone. If the supplier usually runs late, add a buffer. Confirm in writing what ships now, what is backordered, and when it is expected.

4. Agree on how to ship

Does the customer want what is available now and the balance later, or the full order in one delivery? Partial shipments usually improve satisfaction but add a second shipment's cost. Set the policy in advance or ask the customer and record the choice on the order.

5. Tie the backorder to supply

Every backorder should be linked to a specific purchase or production order. If there is no order, the backorder is a promise with no cover. When goods arrive, allocate them to backorders first, in the agreed sequence, before offering them to new sales.

6. Define a priority rule

When incoming stock cannot cover every backorder, who goes first? Oldest first is the simplest rule. Some companies prioritize strategic accounts or contracts with penalties. The key is that the rule is written and known, not decided by whoever calls loudest.

7. Update proactively

If the supplier date moves, tell the customer before they call you. Customers accept delays far better when they hear early, with a new date, than when they discover it on delivery day.

A Worked Example

Hypothetical example: an AC spare parts distributor in Riyadh receives an order in early June from a maintenance contractor for 200 compressors. Available stock after reservations is 80, and a purchase order for 300 is expected in 18 days.

1. The rep sees available stock and the open purchase order while entering the sales order.
2. They offer 80 units within two days and 120 in about three weeks. The customer agrees.
3. The order is recorded for 200, with 80 for immediate delivery and 120 backordered against the purchase order.
4. An invoice is issued for the delivered quantity only; the balance stays open on the sales order.
5. When the purchase order arrives, 120 units are allocated to the backorder before any new sale, and the second shipment is prepared.

Without visibility of the incoming purchase order, the rep would have had two bad options: reject the whole order and lose a customer at the peak of the season, or accept it with a guessed date.

What to Tell the Customer

How you communicate often decides whether the customer comes back, more than the delay itself. A good backorder confirmation covers five things:

1. What ships now and when.
2. What is backordered and, briefly, why.
3. The expected date for the balance, and when you will confirm it.
4. Their options: wait, accept a substitute, or cancel the balance without obligation.
5. The name and contact of the person following up.

Send it in writing, by email or with the order confirmation, not just in a phone call. A written record protects both sides if quantities or dates are disputed later and lets a colleague pick up the follow-up. And never promise a date you do not control: if the supplier has not confirmed shipment, say so and commit to a date when you will come back with the answer.

Write a Backorder Policy

Without a policy, every rep improvises. One customer gets a free partial shipment, another is charged for the second delivery. The policy can be short, but it should answer:

• Which items may be backordered, and which should be offered a substitute first?
• What is the longest wait a rep may accept without manager approval?
• Are partial shipments free, or is there a minimum value?
• Is an advance payment required on backordered quantities, and when?
• What is the priority rule when incoming stock falls short?
• When is the customer automatically offered cancellation, for example two weeks past the promised date?

Backorders in Manufacturing and Contracting

In manufacturing, a backorder is rarely about the finished product itself. It is usually one missing component. A product with twenty components can stop because one low-cost part did not arrive. Plants need visibility of each product's bill of materials and of which components will run short before production starts, not during it. Material planning calculates component requirements from sales orders and planned production, so gaps show up early.

In contracting, a late material delivery to site does not delay one order. It can idle a whole crew and push back a project phase. Material requests should be tied to the project schedule, with purchase orders for critical-path phases tracked separately.

When Your Supplier Backorders You

There is a mirror image: your supplier ships part of your order and backorders the rest. The same principles apply in reverse. Record received and outstanding quantities on the purchase order, get a written date, and keep the PO open for the balance until it arrives or is cancelled. Do not let stale open purchase orders sit for months, because availability calculations treat them as incoming and new sales get promised against stock that is never coming.

Invoicing and VAT for Backorders

• Invoice what you deliver: with partial shipments, invoice the delivered quantity and keep the balance open on the sales order. Do not invoice the full quantity unless clearly agreed with the customer.
• Advance payments: under Saudi VAT rules, tax becomes due on the earliest of supply, issue of the tax invoice, or receipt of payment, to the extent of the amount received. If a customer prepays for backordered goods, 15% VAT is due on the advance when it is received, and a tax invoice must be issued for it within the statutory deadline. Confirm the details with your tax adviser.
• Cancellations: if a customer cancels a prepaid and invoiced backorder, the refund needs a credit note linked to the original invoice, not a manual journal.
• E-invoicing: partial invoices and credit notes fall under the same ZATCA e-invoicing requirements and must come from the system connected to the Fatoorah platform.
• Revenue recognition: revenue is recognized when control of the goods passes to the customer, usually on delivery. An advance for undelivered goods is a liability to the customer until delivery.

How to Reduce Backorders

Improve demand forecasting

Most backorders on regular items come from forecasts that missed a season or a promotion. A monthly demand plan shared by sales and purchasing cuts the surprises.

Recalculate safety stock and reorder points

Safety stock covers variability in demand and lead time. Calculated once and never revisited, it protects against nothing that changed since.

Measure real lead times

Record order and receipt dates for every shipment and use the actual average and its variability, not the supplier's quote. Our guide to lead time management covers this in detail.

Dual-source critical items

Relying on one supplier means their problem becomes yours. An approved second source, even at a slightly higher price, gives you an option in a crunch.

Fix balance accuracy

Backorders caused by wrong balances are the worst kind, because the customer was promised something everyone believed was there. Cycle counting and real-time transaction recording reduce them.

Watch at-risk items

A weekly report of items below reorder point with no open purchase order flags backorders before they happen.

Metrics to Track

Break these down by item and supplier. You will usually find that a handful of items or suppliers drive most backorders, and those are your priorities.

Where an ERP Helps

Managing backorders on paper or in spreadsheets breaks down quickly because it means linking three things at once: the sales order, available stock and incoming supply. An ERP makes that link automatic:

• Available stock after reservations is visible when the order is entered.
• Partial delivery and partial invoicing are supported, with the balance kept open.
• Open purchase orders and their expected dates are visible to sales.
• Open backorders can be reported by customer, item and age.

In Tranquil, order management and sales and procurement cover the path from quotation to invoice, delivery and returns, linked to central and branch inventory, with ZATCA-compliant e-invoices. For the full journey from order to payment, see our article on the order-to-cash process.

Frequently Asked Questions

What is the difference between a backorder and a stockout?

In a stockout the order is turned away because the item is unavailable, and the sale is usually lost. With a backorder the order is accepted and fulfilled when stock arrives, so the sale is kept.

Should I invoice the backordered quantity?

Normally you invoice only what you deliver. If the customer prepays for the backordered quantity, VAT is due on the advance when received and a tax invoice must be issued for it within the statutory deadline.

Is a partial shipment better than waiting?

It depends on the customer and the cost. Partial shipments usually improve satisfaction because the customer can start using what arrived, but they add a second delivery. Ask and record the choice.

What backorder rate is acceptable?

There is no single figure for every sector. For fast-moving regular items it should be very low; for custom or made-to-order items, backorders may be a normal part of the model.

How does Tranquil help manage backorders?

Tranquil links sales orders with inventory, purchasing and invoicing in one system, so available and incoming stock are both visible. Contact the Tranquil team to discuss setting up partial deliveries and open orders.