Policy - Projecting back orders

Sales forecast back order percentage: Percentage of the sales forecast that is used in the planned ordering calculation during projected stockout periods.

BOM forecast back order percentage: Percentage of the BOM forecast that accumulates for ordering during projected stockout periods.

Distribution forecast back order percentage: Percentage of the distribution forecast that accumulates for ordering during projected stockout periods.

⚠️ Note: Contact a consultant to change these parameters. The Projecting Back Orders settings are not available to customers, and this collection of articles is provided for context only, to help determine appropriate values. Because these are global settings, select values that represent the best overall fit across all items.

Back order percentage refers to the percentage of forecasted demand that will carry over if the opening stock is zero or negative.

To determine what this percentage should be, consider how often a customer will either place a back order or wait until stock becomes available in the event of a stockout.

A back order percentage of 100% means that the customer will always return for that product if there is no stock available, while a back order percentage of 0% means the customer will not return and will likely source the product elsewhere.

Overstating this percentage may lead to excess stock, while understating the percentage may lead to another stockout.

When using these parameters, it is important to determine whether the business has a bias towards over or under ordering and whether accumulating excess stock or stocking out will be more detrimental.

Imagine a scenario in which we forecast selling 200 units next month. Due to unforeseen circumstances, we are now projected to deplete our stock halfway through the month. The expected lost sales for the remainder of the month will be 100 units.

Why?
Daily forecast = Monthly forecast ÷ 30
= 200 ÷ 30 = 6.667 units

Lost sales = Days stocked out × Daily forecast
= 15 × 6.667 = 100 units

For simplicity, assume we are meant to place an order for 500 units today and receive it in 30 days.

A back order percentage of 100% implies that when out of stock, a customer will wait for you to receive more stock 100% of the time. Therefore, the entire 100 units of projected “lost sales” will not actually be lost. The customer will return for it next month, which means you must cater for it in your order today, bringing your total up to 600 units.

This may be the case with very niche items that cannot easily be sourced elsewhere. A customer will have no choice but to wait until more stock becomes available.

A back order percentage of 0% implies a customer will never return for the item that was out of stock. They will likely find a competitor and buy it from them. This means you do not have to cater for those returning customers next month, and your ROQ for today remains 500 units.

This may be the case for very generic items that are easily sourced from competitors.

A back order percentage of 25% implies a customer will return 25% of the time and find the product elsewhere 75% of the time. You must cater for those 25% of customers who will return next month in your order today, meaning you need to order 525 units today.

Now imagine you have specified a back order percentage of 25%. If in reality, 50% of customers return for the item, the ideal quantity to order today would be 550 units. Because only 525 were ordered, you will likely be stocked out by 25 units next month.

However, if only 5% of customers return for the item next month, the ideal quantity to order today would be 505 units. Because you ordered 525, you have overcompensated and will likely have an excess of 20 units next month.

It is therefore important to determine whether the business has a bias towards over or under ordering and whether accumulating excess stock or stocking out will be more detrimental.

Refer to the article Projection Tab Explained for more information on how back order percentages affect your stock projection and recommended order quantity (ROQ).

Question: What is the difference between lost sales compensation and back order percentages?
​Answer: Lost sales compensation adjusts your sales history used in the calculation of your forecast (but does not change the actual sales numbers on the enquiry screen). Back order percentages influence your projection tab calculations and orders.

Simply put, lost sales compensation “corrects” your sales history used in the forecast calculation to reflect what you would have sold so that your forecast can be accurate as it is now based on “accurate” sales history. From there, the back order ratio asks “what percentage of my customers who came in looking for this item when I was stocked out will come back when I do have stock? 25%? Okay, now factor that into my next order.”

Lost sales compensation therefore corrects your base forecast (and thus improves your orders) and back order ratio corrects your order and projected orders.