More sales can mean more revenue and a bigger profit for your business, however, as your sales numbers continue to grow companies pass the point of being able to fulfils every order as soon as it's made. This is a sales backlog. This is often unavoidable, no matter how good your inventory management processes that have been set in place.
This isn't necessarily a bad position to be in. Although it is ideal to fill customer orders as quickly as possible, a healthy backlog shows that your product/service is highly in demand.
The importance of a sales backlog
This could mean your product is high in demand, or it could mean that your fulfilment techniques are inefficient. Measuring your backlog helps you assess if your company is in a strong position for growth or this will continue to be a problem as you grow.
Best way to calculate your sales backlog
The best way to calculate your backlog is typically expressed as a ratio. Compare a period of time of your total orders with your ordering processing capacity. The rule of thumb is to have a larger number as this would mean that your backlog is larger. Here's an example of what the formula looks like:
Sales backlog = backlog of orders/total sales
For example if you make 110 sales per week but have a 10 order backlog (inability to fulfil sales) you would have a sales backlog of 0.09.
10/110=0.09
What this means is that for every order 0.09 (or 9%) orders are actually backlogged. Check in to see if this trends up over time or if this is repetitive in a cycle.
How to manage your sales backlog
To manage your sales backlog means effectively understanding what the ratio represents and how it actually impacts or effects your business operations. Check in frequently and implement a faster turnaround time for your suppliers or find ways to be able to deliver your service more efficiently.
Conclusion
The best-case management for your backlog means to find a sweet spot between demand and your available capacity, until you are able to solve either side of the issue. There are many tactics which include new physical processing capacities or increasing efficiency with the inclusion of specific processes.
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