Having a large order backlog is actually not a good thing

Having a large order backlog is actually not a good thingOne of my favorite brain teasers when giving Lean training is the question of whether having a large order backlog is a good thing or not. It is rare for anyone to immediately say that it is a bad thing, and this is why it is such an illuminating example of how to think Lean.

Many companies that are doing well like to tell how their order backlog has increased and is at a high level. This is commonly seen as a sign of success, but it is not necessarily so. To see why this is so, we need to look at the issue from the point of view of both the company and the customer.

A little Taiichi Ohno

One of the most famous Taiichi Ohno quotes goes as follows:

All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing the time line by reducing the non-value adding wastes.

A company is obviously interested in collecting the payment from its customers. If you have sold all of your capacity, it will take a long time until you can fulfill new orders, and usually this also means it will take a long time until you can collect all of the cash.

A large order backlog means that it takes a long time for you to collect the payments from your customers.

What about the customer?

An ideal situation for a customer is to get the service he needs at the exact right time. In many cases, if a customer could get the service immediately upon order, that would be the best. Especially so, if customers could rely on having the service available immediately, and thus would not need to pre-plan their purchases as much.

A large order backlog means that the customers need to make compromises on when they order and receive your product.

Backlog is inventory

One of the seven wastes according to Lean is inventory. If you have things that you do not use for anything right then, it would be better if you didn’t have those in store and could summon them as needed. A large order backlog is often also connected to a long delivery process, which means that you actually have a lot of work in process, which in turn translates into actual capital being tied into all that unfinished production.

A large order backlog means that you tie up capital into work in process.

What about the real world?

Well, in real life, most companies would struggle immensely and maybe even fall if their order backlogs became non-existent overnight. The classic Lean metaphor on inventory applies perfectly here: A company is a ship sailing on a sea of inventory, with rocks (problems) just beneath the surface. As water is drained (inventory reduced), the problems become apparent. Drain the water too fast, and you won’t be able to clear all the rocks before the ship runs into them!

However, the point is to change the way you think. If you see order backlog as a good thing as such, you will try to build a large order backlog. If you see that an order backlog tells you that you are receiving orders that you are unable to fulfill immediately, and that it tells you that you can still improve your process and become more flexible in serving your customers, it is no longer such a vital indicator of success. Instead of trying to maximize it, your efforts can be focused on determining how low on outstanding orders you can go while still maintaining enough predictability to keep your system running. And then work on making your system a bit better so you can go lower still!


Photo: UASC Alula by Roel Hemkes @ Flickr (CC)

Author: Ville Kilkku

I run my own consultancy business, so if you find the ideas on this blog intriguing, contact me at consulting@kilkku.com or call me at +358 50 588 5043 and we can discuss how I can help you solve your business problems. I am currently based in Finland, but work globally.