Incorrectly diagnosing inventory planning issues can have massive consequences with respect to excess inventory, stock outs or both. The good news – by analyzing plan changes over time, you can quickly and correctly discover root causes to planning problems and recommend appropriate solutions!

So how do you look at a forecast or demand plan, discover planning problems, and develop the appropriate response? One easy approach is to look at demand patterns – these are recurring demand signals across multiple planning versions. The repetitive patterns of demand across forecast versions can signal unresolved issues with a consistent root cause.

Recognizing demand patterns is extremely important; patterns offer a simple heuristic that can help you discover problems quickly and resolve them before they create calamity in your organization. The Backorder Bow Wave is one of those patterns that can spell death if not properly managed. Because of the challenging global logistics environment and Force Majeure events like COVID-19 public health policies and the Renesas Plant fire in Japan, you should not be surprised to see this pattern in your data.

What is the Back Order Bow Wave?

Back orders are orders that are past due or current and expected to be late. In other words, your customers placed actual orders and you promised you would deliver them by a certain time, but that time has either arrived or passed and they still are not shipped. Unresolved backorders have a persistent, consistent pattern over time if you look at data correctly – the Backorder Bow Wave. (See Figure 1). The wave arises when the late but open orders are rolled into the current month of each forecast version, creating a wave that is pushed forward across planning versions.

Figure 1 - Backorder Bow Wave Across Forecast Versions

In Figure 1 we see the Backorder Bow Wave illustrated. Each line represents as specific forecast month, and it’s forecast changes over time. The horizontal axis represents forecast versions. Moving from the April forecast version to the May forecast version, you can see a spike in May demand (orange line). Then the spike drops for May with the June forecast version but appears in the June month (gray line). And the pattern repeats with the July revision for the July month (yellow line), and August version for the August month (light blue line). The is the unfulfilled backorder wave being pushed forward with each revision. In Figure 1, August is the current month, and the pattern has not yet manifested in September.

Symptoms of the Backorder Bow Wave include this wave pattern in demand in the current month, plus repeated misses of demand for prior months. The wave height and slope are impacted by order cancellations, shipping of backorders, addition of new backorders, or rescheduling orders. In the diagnostic process, demand should be disaggregated by inventory fulfillment location to determine the origin point(s) of the wave. Afterward, conduct root cause analysis on individual orders to find patterns in root causes.

Remember that the presence of a wave pattern doesn’t mean that the Backorder Bow Wave is the only problem, and it may not be the primary issue. By measuring the wave magnitude and comparing to variances between unit forecast and revenue forecast for prior periods, you could assess the significance of the issue to overall performance. Also keep in mind that unfulfilled backorders can cause difficult to quantify problems, such as lost orders, down the line.

Why is the Diagnosis Important?

Proper diagnosis leads to proper response and mitigation. Lacking a proper analysis of the Backorder Bow Wave phenomenon, a finance analyst might presume that the underlying issue is a positive bias forecast, which consistently causes the organization to overestimate demand and underperform in the actuals. This incorrect diagnosis could drive either downward forecast revisions in future months (to correct the presumed bias) or shutting off the supply spigot to “burn down inventory”. If the problem is purely backorder driven, these responses will likely introduce new issues, rather than resolving the existing one.

Furthermore, repeatedly failing to resolve backorders will lead to the following types of issues:

1. Excess unplanned demand inside lead-time from other supply locations, as customers and sales managers try to urgently backfill for unshipped backorders.
2. Lost future sales, as customers cannot plan replenishment correctly since they don’t know when the open order stock will ship.
3. Missed consumer holiday or promotional opportunities.
4. Lost market share as customers switch to other vendors who can fulfill their orders.

Root cause analysis and treatment

The presence of a Backorder Bow Wave is a good indicator that you need to focus analysis on the inbound supply chain and sourcing to achieve demand/supply balance. Causes I have seen for these situations include:

1. Demand exceeding material or production capacity resultant from poor planning or force majeure events
2. Finished goods accumulating at origin due to global imbalance of vessels and containers.
3. Finished goods accumulating at origin due to financial imbalances (i.e., cost of inbound logistics exceeds revenue/profit potential).
4. Inability of customers to complete transactions due to financial or storage constraints.

Investigation of root causes on these issues is critical, as the only valid response is to understand the actual cause and mitigate that issue appropriately. With a correct diagnosis and mitigation tactic, you will see the magnitude of the Backorder Bow Wave diminish over time. As you work on resolving the wave, make sure to measure the change in wave height over time. If the wave height is growing, it’s getting worse. A consistent wave height could suggest that the issue is stabilized, or obsolete but not resolved. In the ideal scenario, you will collapse the bow wave, thereby creating a more balanced plan with respect to demand, supply and revenue!