Backorders are purchase orders made to the supplier for products that are already out of stock from a given location being served. Backordering is the process of selling inventory that the company doesn’t currently have on hand, and can therefore only take place when the demand is captured in a formal manner. It represents a specific challenge in terms of inventory optimization as backordered units are typically associated with a degree of urgency coming from the client. They are taking an upfront commitment for purchasing a product that is not readily available, and extended product unavailability is going to be perceived as a lack of good service provided by the distributor.
From an inventory control viewpoint, backorders are typically represented as negative values within the available stock. The available stock should not be confused with the stock on hand which represents the quantity of stock physically present on the shelf. However, when MOQs (minimal order quantities) are large, it is not always a reasonable economic option to fulfill every backorder because satisfying the MOQ constraint may result in creating a lot of dead stock. Backorders are a complexity that must be carefully managed to capture a greater portion of customer demand without compromising service.