Backlog (Order)

The concept of an order backlog is pretty simple. It is the queue of orders that are waiting to be fulfilled.

This queue occurs when customer demand exceeds the ability to immediately supply items to the customer.

Backlogs tend to be dynamic. That simply means that they grow and shrink as orders are placed. Backlogs also tend to be larger when there is customization or a lot of variety in the finished product.

Continuous improvement, and specifically Lean play a major role in the strategy for managing backlogs.

Before I dive into that, let’s first cover the pros and cons of working off of a backlog.

In a perfect world, a customer order is filled just as the product is rolling off the assembly line and is immediately shipped out. Of course, there are two major problems with this. The first is customers don’t coordinate their orders with each other, so the load on your company is never going to be perfectly sequenced and balanced to your capacity.

So, to manage that, most companies will create a finished goods inventory of non-custom product and work off of a backlog for custom items.

And that is the second problem with balancing demand to the supply rolling off the assembly line. Most products with customization get their specificity attached to it well before the last station on the assembly line.

Problem Orders

In addition to the customization issue and the capacity issue, backlog can grow depending upon the leniency of your ordering process.

Some companies are accommodating to their customers and may add orders to the backlog before deposit checks are cashed or credit checks are complete, or administrative issues (i.e. incomplete order information) are resolved. This increases the backlog, and potentially causes additional increases in it down the road. When these orders get bogged down, or when the sales team needs to spend resources resolving issues, other backlogged orders get neglected.

Customization and Backlogs

With custom products, you will have a process where the product transitions from general in nature to being specific to the customer. The closer you can get that point to the end of your production line, the easier it will be to manage your backlog. Your order will be less subject to changes while work is in process. You will also be able to streamline the upstream processes more without needing to manage all that customization.

Early customization is also error prone. If, at any point, that item is damaged, you have to start over at the very beginning. There is also the issue of having greater chance to make a production mistake on a custom order. Again, depending on the nature of the error, there can be a lot of work required to correct it.

CI and Backlogs

Continuous improvement helps with backlogs in a few ways.

The first is in quality. When you have good quality, the chance of making a mistake on a custom order goes down. In a non-custom situation, if you have a quality problem, it will affect your bottom line, but generally lead time impact is minimal. You just grab the next item in the pile. With custom products, you have to go back to the beginning, and that order sits in your backlog, angering your customer.

The second is reduction in WIP, or work-in-process. When you have lots of piles between processes, you increase lead time. That means bigger delays from when the customer orders until the product leaves your facility. Get rid of the piles, and the workload stays the same, but the throughput gets faster. CI provides the tools to reduce the problems that lead to those piles between processes.

Productivity is important, but generally has a low impact on backlog. If your company has 100 people making a product with a 3-week lead time vs 150 people doing it, the end result doesn’t change, backlog wise. Indirectly, though, productivity ties in with capacity. If you have bottleneck processes that contribute to delays when demand spikes, increased productivity can reduce the impact on that operation.

Along the same lines, with strong Standard Work and a flexible, well-trained team, your company can adjust more rapidly to shifting demand. When backlogs grow due to seasonality or overall changes in the market, everyone in the company will be impacted. But in many cases, backlogs grow when there is a spike in demand for individual product lines. That can be managed with the ability to move people from low-backlog production areas to help with the high-backlog processes.

Consistency and Backlogs

While many people think speeding up processes is the most critical aspect of managing backlogs, that is incorrect. The most important think is consistency. You need to be able to produce reliable parts when you say you will.

Being slightly slower with a tighter standard deviation of delivery dates is far better than being slightly faster, on average, with a large spread. In the first case, you make lose a touch of business during the ordering process, but they will generally be satisfied because you are meeting the expectation. Of note, if you later improve your delivery time, you may have a chance to win those customers over.

But if you make promises and then miss on those promises, you can lose a customer permanently. They will be very reluctant to give you a second chance if you overcommitted.

Words of Warning About Backlogs

• Make sure to flush out your backlog periodically. This applies specifically to orders that make it on the list to enable ordering materials and planning but won’t be built until some other administrative task is complete.
• Large backlogs open up the opportunity for changes. Even if you are past the point where you can change something, from the customer side of things, they will see it as unresponsive if they are told they have to wait weeks or months for something, but can’t tweak the options.
• Backlogs need management, especially when it is administratively driven. Some companies “lean forward in the saddle”, meaning they get orders into the queue before all the details are nailed down. It lets them start procurement and capacity planning but adds an element of risk.
• Overcapacity is wasteful. While it is nice to have a lot of flexibility to add capacity, there is a significant cost to it. And it is not just the real, outgoing cash flow. There is an opportunity cost to the machines, space, and people that are committed to a process without enough demand to keep them busy.

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