out of stock but still available for customer purchase, it is on backorder. Customers purchasing backordered products will have to wait longer to receive the product.
The customer’s wait time depends on where the shortcoming occurs in the supply chain. If the stock shortage stems from the manufacturer, the wait time for the consumer may be substantial, harming customer satisfaction. Accurate inventory management and communication up and down your supply chain can reduce the need for backorders and earn customer loyalty.
Backorders occur for several different reasons:
- Demand exceeds supply due to seasonal trends, marketing, or emergency
- Bad weather or other road conditions impede timely transportation
- Political upheaval in a foreign country (in cases of international imports)
- Poor planning around lead time from supplier
- Supplier production/delivery problems
How you handle backorders is important to perceived customer service. Customers are generally happy with backorders provided they know what is going on, so, as with all customer facing matters – communication is key. If you frequently frustrate customers by making them wait and/ or communication is poor, you risk losing that customer and your reputation. With so many ecommerce businesses around, your customers might look to take their business elsewhere.
Backorder vs. Out of Stock
An item is out of stock when the seller doesn’t have the item in inventory and has no sure date to restock, or the item is seasonal or a limited run. Backordered items are expected to be available in a reasonable timeframe.
Disadvantages of Backorders
Backorders do have some significant downsides that can cost your company. These include:
- Losing out on business: Customers may not want to wait, or trust the company to fulfill their orders, causing them to cancel and purchase elsewhere.
- Loss of market share: If customers frequently encounter backorders or must wait a long time for fulfillment, their loyalty to your brand may wane, and they could turn to other brands.
- Increased complexity: Backorders increase the chances of a company having to resolve customer service issues, such as trying to update expired payment information.
Advantages of Backorders
Positive reasons to offer backorders include increasing sales and adding some flexibility for small businesses.
Other advantages include:
- Market insights: Backorders act like customer surveys, indicating what kinds of products buyers want, and when they’re in the highest demand.
- Improved cash flow: Companies that avoid holding excess stock, with the associated costs, free up cash for other priorities. In some industries, less inventory also translates to reduced taxes.
- Cost savings: Minimizing storage and other inventory costs that come with holding extra stock.
Causes For Backorders
Backorders can happen for a wide variety of reasons, both due to your supply chain or through external factors. Here are some of the most common reasons:
Sudden Change in Demand
An unusual or sudden change in demand is the top reason back orders occur. There are many factors that can cause this, including something as simple as a tweet or recommendation from a celebrity who endorses the product. Sometimes, however, even if you anticipate an increase in demand, you might have underestimated your stock levels. For instance, you might have explored a new marketing channel recently, doubling your estimated leads. If you’ve been following sound inventory control practices, you’ll probably have your stocks at optimal levels for standard sales. But these levels can get disrupted with surprise occurrences. Unfortunately, these sudden surges in demand can be very hard to forecast, resulting in backorders.
Supply Chain Issues
A backorder can be the result of issues with your supply chain. Your supply chain might not have anticipated a sudden surge in demand for their raw materials. This could result in challenges with supplying vendors, leading to decreased output. Often, however, supply chain problems result from the individual components not communicating with each other properly. One mistake from someone downstream in the chain can cause a ripple effect that will intensify once it reaches you. For example, say you (the retailer) requested a certain amount of stock from your wholesaler. If the wholesaler is extra cautious, they might order less than what you advised them to, just to be on the safe side. This “ripple effect” will continue from the distributor to the manufacturer. Then when you finally order, you’ll end up only getting a fraction of what you requested. This results in lower stocks and, potentially, backorders.
An employee may enter an order as a backorder even if the item is available. Or, worse, a retailer may accept a backorder even though the item is out of stock. This may happen because of error or because of lag time in inventory updates.
Insufficient Safety Stock
Even if the supply chain fails, most companies have an insurance policy to help prevent out-of-stock situations. This is called a safety stock, which is an excess supply of stock used as a buffer for emergencies. In the face of increasing demand or low supply, safety stocks can help keep you afloat. However, if you don’t accurately estimate the amount of safety stock you’ll need on hand, this too can result in backordered products.
Warehouse Management Problems
Warehouse management refers to all the processes involved in daily warehouse operations. A glitch in an inventory management system may provide inaccurate data, or a breakdown in data entry may lead to stock being miscounted or misplaced.
How to Avoid Backorders
Sometimes backordering isn’t done intentionally, but is a result of improper planning. If your business is running into issues with backordering and it’s having a negative impact on your sales and your inventory turnover ratio, there are a few ways you can try to avoid the issue.
Adequate Safety Stock
Safety stock is inventory that is purchased specifically as a buffer in the event that demand suddenly increases. This stock sits in storage and is accessed when the normal inventory sells out. This ensures that your customers can always purchase the items you offer for sale without having to wait. Having a dedicated order management specialist on staff to conduct a regular inventory audit is a great way to ensure stock levels are routinely monitored.
Demand forecasting is using your historical data and trends to predict future sales and demand. A business with adequate data regarding their sales and inventory trends can see patterns emerge that will allow them to order inventory at appropriate levels. This can easily be done by using inventory management software. You should also plan for how many inventory days you expect products to sit in storage and if your supplier requires an MOQ (minimum order quantity)
In case your primary supplier isn’t available to meet your needs, you’ll always have back-ups who can jump in. Having multiple sources also provides competition and an incentive for each supplier to improve their prices and services.
Lead Time Management
Your supplier lead time is the amount of time it takes for you to receive a product from the supplier. This time can depend on factors like how long it takes your supplier to acquire the raw materials, how long it takes them to make the product, and how long product inspection takes. Coordinate with your suppliers to find ways to decrease the lead time. Especially if you’ve noticed they tend to deliver their products later than expected (for example, they say it will take them four weeks, but it really takes them six weeks), start having conversations on establishing better turnaround times. Maybe there are more efficient ways both parties can function and better meet demands.
Partner With a 3PL
A third-party logistics provider (3PL) can improve your backorder customer experience by expediting backorder fulfillment. They can provide fulfillment solutions that keep your backorder products moving smoothly through the supply chain. When a backorder product arrives at a 3PL fulfillment center, Their warehouse management team expedites its fulfillment. Instead of going to the shelves like other warehouse products, the product is immediately shifted to the shipping dock in a process called cross-docking. Consider seeking out a 3PL capable of managing and expediting backorders before listing out-of-stock products for purchase.
Backordering is relatively simple when dealing with one out-of-stock item. But if you’re dealing with a stockout situation across several products, or you’re relying on backordering as your main inventory strategy, you need to be able to match each purchase order with the correct sales order before you begin the order fulfillment process. In order to manage your incoming items and outgoing sales simultaneously, it helps to have an inventory management system that can match up your sales and purchase orders for you. Backordering helps you retain your customer base and ensure that your sales are doing well even when you don’t have much stock. It also benefits your business by reducing costs, reducing waste, increasing your product value, and allowing you to offer custom orders. With good customer service and an efficient inventory management system, you can make backordering a successful strategy for your business.
Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.