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Joshua Zable

Customer Care

Three Steps to Prevent Back Orders

How to optimize your inventory levels

Published: Tuesday, April 18, 2023 - 11:03

Optimizing inventory, like most problem-solving, requires a thoughtful process and a few steps. Naturally, the easiest way to prevent back orders is to always have a lot of inventory on hand. There are ramifications for not optimizing inventory, though. Overproducing and maintaining high inventory levels could allow products to spoil or even decay. Excess inventory not only creates costs today, it also generates hidden costs later if you need to produce more goods to replace products that sat on the shelf for too long.

There are different ways to calculate your optimization, but at the crux of optimizing inventory are three main steps: brainstorm the factors that affect inventory, collect your data, and analyze your data. Before we dive into each step, let’s cover a few basics about back orders.

What is a back order, and what causes it?

Put simply, a back order means that a product cannot be fulfilled or delivered because it isn’t in inventory. That may occur because the demand for the product is higher than anticipated, or inventory levels were too low to meet the current demand.

Are back orders bad for business?

In one word, yes. We’re all customers of sorts, and none of us feel good when a product or service we want isn’t available. It not only hurts the current customer experience but also has long-term implications for your brand and customer relationships.

So... how do you reduce back orders?

Three steps to prevent a back orde

Step 1: Brainstorm the factors that affect back orders, including inventory levels

The largest factor in preventing back orders is your inventory level at hand. If you don’t have enough product in stock, you’re going to experience back orders. But inventory at hand is only one factor. You also need to be aware of all the things that affect a moving supply chain, like inventory in transit, sales forecast, historical sales performance, and even impact from your own suppliers.

So how do you keep your inventory levels high enough to meet customer demand, but low enough that you’re not holding excess inventory? You need to brainstorm the factors that affect your inventory levels. Using structured problem-solving tools like critical-to-quality trees or fishbone diagrams can set you up for success.

Step 2: Collect your data

Once you’ve established the critical factors that affect back orders, you’ll want to gather data on them. Recognize that your inventory data probably come from multiple sources and systems, and the process of requesting and preparing your data can take time. Consider how much data you need to collect.

For example, going back five years is probably too much, given all the likely changes that have occurred over that time period. A few months of data may be more reasonable. So, use your best judgement to capture a representative snapshot of your process. You can employ your IT department to help, or leverage a powerful data unification tool, like Minitab Connect, to access, integrate, and prep your data for analysis.

Step 3: Analyze your data using predictive analytics

Once your data are collected, it’s time for the fun part: analysis! Traditional business analytics and visualizations may fall short here because the most likely visual to emerge is that the lower your inventory on hand, the higher the back order.

Since we already know this, what we’re really looking to identify are the following: Is there another critical factor that stands out as being a key driver of back orders? Is there an optimal level of inventory that can minimize back orders without overstocking and overproducing?

So why predictive analytics? In basic terms, imagine creating an equation with all the factors that influence back orders as predictors, and back orders as a response. Just like in high school algebra, these different factors have different weights and, in turn, different levels of influence on the outcome. Minitab has developed solutions specifically to help you solve these problems.

To see an actual analysis in action, check out the video below on ways to use predictive analytics to predict inventory.

Published March 17, 2023, on the Minitab blog.

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About The Author

Joshua Zable’s picture

Joshua Zable

Joshua Zable is the chief marketing and strategic planning officer and a member of the board of directors for Minitab. Before coming to Minitab, he served as a principal and senior vice president of Black Briar Capital, a private investment firm. Prior to that, he was a vice president at Dentsply Sirona, where he held various leadership positions involving marketing, communications, investor relations, and strategic planning.