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What Is a Backorder and How to Manage Them? - YouTube
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understanding and managing back orders
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back orders are orders for goods that a
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company cannot fill at present
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because demand has outpaced supply
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there are a lot of complex terms used to
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describe how companies keep goods
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flowing to consumers
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from erp and mrp to fifo and lifo
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to supply chain and demand forecasting
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there seems to be an
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endless list of terms but one key term
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often overlooked
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and misunderstood is that of backorders
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high demand is sought after by all
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companies but there are times when
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circumstances may push demand to a level
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that cannot be filled
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back orders are orders for goods that a
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company cannot fill it present
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because demand has outpaced supply
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it may represent a good that is
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currently in production
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or it may represent one that has not yet
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begun production
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in a symbol to order environments it may
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represent orders partially built
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and waiting on a component to arrive
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back orders should not be confused with
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out of stock
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in the case of out of stock supply or
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production may
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be uncertain it may also be the end of a
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product's life cycle
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and slated for discontinuance backorders
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on the other hand
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are in processed or planned production
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that has encountered a lag due to
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several factors
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the product will be made it is simply
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not ready at the time the sales order is
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received
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back orders can be an order for units of
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a specific part number
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or one of many parts ordered in many
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cases
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orders consist of more than one part
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number and those available are shipped
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as requested
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it may also mean shipping a part of an
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order
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for example if someone orders 500
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kilograms of flour
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the producer may have enough to fill 350
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kilograms
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but have another 2 000 kilograms in
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production
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depending on quoted lead times the
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producer may be able to wait until an
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additional 150 kilograms are produced
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and ship the order complete however if
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the expected production will not be
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ready until
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after the quoted lead time the producer
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may ship the 350 kilograms
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and notify the customer that the balance
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of 150
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will ship on a later date the key
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is communication by communicating the
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presence of a back order
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the supplier lets the customer know what
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is inbound
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and when the balance will be there this
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allows both the supplier
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and the customer to continue operations
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uninterrupted
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back orders are not inherently bad it
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all depends on how they are managed
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they can occur for many reasons
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including
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unusual demand a common reason for back
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orders
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is an unusual demand this may be the
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result of a seasonal event
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such as a holiday it may also be the
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result of natural events
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such as hurricanes and disasters where
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people order more of an item than usual
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and it may simply be the result of a
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very popular product
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or one that was noticed in the media
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leading to a rush
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low safety stock companies manage their
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supply chain tightly
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to keep from having too much or too
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little stock in inventory
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regardless of whether that supply chain
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management is automated
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or manual there will be a time when
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safety stock levels are miscalculated
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supplier issues let's face it
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in a global economy with supply chains
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stretched across the globe
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there will occasionally be supplier
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issues
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this may be the results of acts of
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nature shipping or dock strikes
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or regulatory compliance it may also be
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the result of bad quality on the
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supplier's end
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use of multiple suppliers another reason
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for back orders related to the supply
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chain
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is the use of multiple vendors by
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ordering components from multiple
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sources
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a buyer reduces the risk of placing all
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hopes in one segment of the supply chain
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however a missed shipment or problem by
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one supplier
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may not be able to immediately be
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addressed by the secondary source
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variation in order patterns holiday
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seasons
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weather events and natural disasters can
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cause variations in order patterns
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companies may rely on forecasts and
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demand planning models for large
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customers
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total orders or for specific product
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lines
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but sudden variations in order pattern
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can throw manufacturing off balance
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and result in back orders
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back orders are usually expressed as a
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dollar figure
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however there is an impact on how
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backorders are accounted for
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most companies that allow backorders
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record them as
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back orders on their financials rather
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than as a completed sale
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the reason for this is simple if the
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customer cancels
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the back order can be removed without
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having to reconcile accounting records
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this keeps a back order from impacting
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the bottom line while the transaction is
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in flux
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there are other accounting
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considerations as well
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back orders may impact inventory and
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other holding costs
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if the back order is due to a specific
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part or raw material
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that is part of a process or assembly
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then the other parts that go into that
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assembly are subject to regular
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inventory procedure and valuation
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the same goes for holding costs even
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though the product
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isn't yet recorded as a completed sale
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rent
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utilities and labor must still be paid
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for holding components
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that go with the material being awaited
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other accounting concerns include
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expedited shipping costs
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which must be rolled in at some point
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into the financials
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it may also include both tangible and
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intangible costs
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both of which must have some accounting
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to track back order progress
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whether a back order is a good thing or
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a bad thing
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depends on several factors one advantage
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of back orders
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is that it can show a healthy increase
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in demand for a product
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if kept at a minimum and managed
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correctly this can help companies plan
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for growth
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to deal with consistent increases in
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demand
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another advantage is that back orders
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can help companies maintain lower
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inventory levels
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freeing up cash flow for operations and
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expansion
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by running leaner back orders can drive
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more profitability
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by impacting everything from improved
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cash flow
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taxes that would have been levied on
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inventory and reduced labor and holding
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costs
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as for disadvantages back orders can
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indicate that a company is too
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lean it is also a disadvantage for
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manufacturers whose lead times on
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production
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are long based on process realities
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if lead times are too long and back
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orders drag on
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customers may cancel orders and look
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elsewhere
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cancelled orders could also lead to
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overstocks in inventory and finished
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goods
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as long lead times on production means
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that manufacturers must purchase raw
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materials and components over a long
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time frame
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if the customer cancels the orders
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during that time
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producers are left with high inventory
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costs
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while back orders can be managed to be
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beneficial for a company
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the key is to make sure the production
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system is balanced
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here are five tips to minimize back
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orders in a way that will balance the
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system
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and keep customers happy
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one regularly review popular items
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it's always great to have a product that
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takes off but product life cycles vary
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by tastes
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season and other factors reviewing the
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history of popular items
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will help manufacturers develop
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strategies for balancing the system
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in advanced erp and mrp systems
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these histories will be available
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accurate and
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sortable in a way that allows for the
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best analysis of the data
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two give manageable etas
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customers may be willing to wait for a
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reasonable backorder
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but communication is critical to ensure
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that they do not cancel the order
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manageable accurate etas can provide
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customers with a reliable arrival time
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for their product
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three calculate and set reorder points
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often products require a complex blend
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of raw materials or components to
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produce a final unit
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these raw materials and components may
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have different inbound lead times from
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vendors
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calculating realistic reorder points
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based on consumption history
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will reduce the risk of running out of a
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component and causing the need for a
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back order
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4. set safety stock
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related to reasonable reorder points
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setting a safety stock to address
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increases in demand waste spoilage
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etc can reduce the need for backorders
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as well
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five integrate systems
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small and medium-sized manufacturers
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often use disparate systems of different
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vintages
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this causes information silos and the
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need to reconcile data from department
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to department
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introducing the chance of error by
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integrating systems under one umbrella
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systematic causes of backorder can be
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further reduced
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while backorders are always a
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possibility under the right
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circumstances
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balancing the production system managing
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the strategies to address back orders
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and reducing human error will go a long
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way toward making sure that back orders
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when they happen do not hurt a company
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the best way to this is through an
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integrated cloud-based
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erp mrp system to tie these components
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together
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the five tips listed above are sound
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advice regardless of the system
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however a unified system with advanced
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analytics
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and accurate history and built-in
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production
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scheduling inventory and shipping
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functionality
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such as found in an erp mrp system
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will make the process seamless and allow
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manufacturing companies to operate with
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a minimum of back orders
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and to properly balance and manage the
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ones they do incur
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to their financial advantage
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