Posted by Dylan Wan on March 5, 2007
Backlog refers to unfinished work or to customer orders that have been received but are either incomplete or in the process of completion. Backlog orders are also known as Open Orders.
Backlog analysis lets you to investigate the potential revenue by reporting all the work that have been received but not yet fulfilled. If you assume that you can fulfill all the remaining work in your backlog, you can predict how much revenue you will generate over the remaining period.
It is important to watch your backlog over time. If your backlog is raising, you may face an increasing sales and demands or you may experience a production problem. If your backlog is falling, you may face a sales down trend or you may increase your production efficiency. You should perform a root cause analysis on the backlog changes and adjust your operation accordingly.
Order Backlog analysis is typically done by product, product category, geography, or sales channel for a given organization. You should also be able to drill down to the customer, order, and order line levels.
A top order backlog report would be useful. It lets you know the pipeline of order backlog so you can proactively work at reducing the backlog to ensure customer satisfaction.
Order backlog is used mainly in the manufacturing companies.
Backlog in the service or construction industry
Backlog can also be measured by the total contracts or award in place that have not yet been worked. Contract and backlog value is a strong base for forecasting the revenue.
Here is a sample definition of backlog described in an earning report:
Backlog consists of the estimated revenue attributable to the uncompleted portion of lump sum engineering, procurement and construction contracts and variation orders plus, with regard to engineering services and facilities management contracts, the estimated revenue attributable to the lesser of the remaining term of the contract and, in the case of life of field facilities management contracts, five years. To the extent work advances on these contracts, revenue is recognised and removed from the backlog. Where contracts extend beyond five years, the backlog relating thereto is added to the backlog on a rolling monthly basis.
Backlog includes only the revenue attributable to signed contracts for which all pre-conditions to entry have been met and only the proportionate share of joint venture contracts that is attributable to Petrofac. Backlog does not include any revenue expected to arise from contracts where the client has no commitment to draw upon services from Petrofac.
Backlog day is a measure of number of days that backlog can be fulfilled with the average capability from the past. It is calculated as follows:
Backlog Days = Total Backlog value / Average daily revenue for a given group over the prior 12 months.
For example, your Services East organization has $123M in backlog and had generated $260M over the last 12 months (260 days). The backlog days will be $123/$1M = 123 days.