When a product becomes popular and sells out, or a supply chain disruption delays stock replenishment, backorders are one way for retail and e-commerce businesses to avoid losing a sale outright. In fact, backorders can be a normal part of business and an important part of healthy inventory management, if handled correctly.
For example, a backorder with a short turnaround can be manageable, create natural marketing and demand, and allow merchants to save money by maintaining lower inventory levels. On the other hand, a large log of backorders with long wait times can result in supply chain bottlenecks, dissatisfied customers, and lost revenue.
What are backorders?
Backorders occur when an order can’t be fulfilled at the time of purchase because the item is not in the seller’s available stock, signaling that demand has exceeded supply. Also known as backlogs, backorders may be items that are in transit, in production, or need to be manufactured before a customer’s order can be fulfilled.
The process of backordering involves allowing the customer to place their order even when you don’t have sufficient stock on hand, with the promise to deliver the item within a set timeframe. A business’s backlog can be a key indicator of supply chain efficiency and an essential part of proper inventory management, planning, and analysis.
What causes backorders?
Backorders become necessary mainly due to stockout situations, and stockouts may occur for a variety of reasons. While some stockouts happen because of circumstances outside of your control, many can be eliminated—or at least reduced—through accurate inventory planning. Here are a few of the most common reasons backorders are implemented:
- Increased demand. Seasonal popularity of certain products or surges in demand due to other circumstances may cause sales for some items to outpace supply. For example, if a viral advertising campaign takes hold unexpectedly for a particular toy around Christmas, demand for the toy may rapidly outpace stock levels before ordering adjustments can be made, forcing businesses to place the item on backorder to maintain holiday sales until inventory can replenish.
- Supply chain delays. Supply chain delays, like the kind experienced during the Covid-19 pandemic when shipping capacities and labor forces shrank, can result in lengthy production and transit times, leading to stockouts that require backorders.
- Manufacturing issues. Raw material shortages, factory shutdowns, and labor strikes can all lead to a halt in production for certain products. This can have a domino effect that results in orders not being fulfilled on time and stock levels suffering.
- Ordering errors. Lag time in inventory level updates, inaccurate information, and simple human error can all lead to unexpected stockouts, requiring backorders until the items can be properly replenished.
- Inaccurate forecasting. Sometimes backorders occur due to inaccurate inventory forecasting. Miscalculations regarding safety stock levels, sales data, and lead times can result in businesses ordering an insufficient amount of product to meet customer demand.
How backordering works
Backordering introduces additional logistical steps to your business’s fulfillment process. In a normal scenario, you would accept an order or sale from a customer, match the sale to the item in your inventory, and fulfill the purchase by delivering the product to the customer. For backorders, a sale is accepted as a backorder, with a receipt detailing the timeframe for fulfillment. The backorder is then converted to a purchase order and sent to the respective vendor or supplier. Once the purchase order is accepted, filled, and delivered by the vendor, you can then deliver the item to the customer.
If you only have one or two products on backorder, the process remains relatively simple. However, if you have a lot of items being backordered, managing the incoming sales, purchase orders, vendor deliveries, and order fulfillment can get complicated. Unless you have a good system in place to accommodate backorders and are able to meet the promised timeframe for fulfillment, you could end up losing frustrated customers to your competitors.
Advantages and disadvantages of backorders
Backorders can be problematic, but they aren’t always a bad thing. In fact, as long as wholesalers, retailers, and e-commerce businesses stay on top of them, they can actually be a net positive for their business in several ways. Here are a few of the advantages and disadvantages of backorders:
- Revenue and improved cash flow. First and foremost, backorders keep the money coming in. Rather than an out-of-stock notice and a potential sale lost to a competitor, backorders allow businesses to continue to make sales, even without the inventory on hand to fulfill them.
- Reduced inventory costs. Having less inventory means reduced storage costs, less deadstock, and more cash freed up to be spent in other areas of the business.
- Increased demand and marketing. Backorders can also have a natural marketing effect on certain products. When an item sells out, some customers may become more interested in the product because of its perceived popularity. (It should be noted that this marketing ploy typically only works for products that have already garnered significant attention, demand, and exclusivity.)
- Customer dissatisfaction. The biggest risk involved with backorders is customer dissatisfaction. Constantly backordered items can lead to customers leaving your brand to shop with competitors. In addition, if the logistics around your backorder process result in further delays to fulfillment, it can result in even higher levels of customer dissatisfaction than if the item is simply out of stock.
- Reduced brand loyalty. Frequent backorders, especially for products that customers can find versions of elsewhere, can ultimately lead to a drop in brand loyalty and a loss of market share.
- Logistical complications. Backorders require careful management to avoid further issues. Instead of simply having inventory on-hand to sell, you must now coordinate a variety of accounting, shipping, and communication logistics to ensure each backorder is being fulfilled and customers are happy.
How Inventory Planner can help minimize backorder issues
There are a few strategies that can help minimize backorders—or at least make them more manageable. You can use drop-shipping to expedite the shipping process by having vendors ship backordered items directly to the customer. You can also look for ways to improve your supply chain efficiency, reducing shipping and lead times to ensure stock levels are replenished as quickly as possible, even when ordering errors or unexpected demand surges occur. However, the most effective way to manage backorders without becoming overwhelmed is to improve inventory planning practices. And the best way to do that is by using a dedicated inventory planning software like Inventory Planner.
Maintaining optimal inventory levels for every SKU, warehouse, and sales channel, all while accurately forecasting demand and supply patterns, can be challenging. That’s why you need a powerful solution like Inventory Planner that can perform complex calculations, account for multiple variables, and maintain accurate predictions, even as customer demand abruptly shifts, supply chains become disrupted, and lead times fluctuate.
Inventory Planner provides businesses with the insights they need to adjust to these rapid market fluctuations before stock levels get depleted and backorders become necessary. It helps predict future demand, factoring in seasonality, upcoming promotions, marketing campaigns, and other aspects that can shift customer preferences and buying patterns. With up-to-date inventory information, reliable insights into over 200 different metrics, and accurate forecasting and purchasing recommendations across all SKUs, product types, departments, warehouses, and suppliers, you can be confident that your inventory levels will be optimized to avoid any unexpected stockout.
So, while backorders can be a useful tool in the retailer and e-commerce repertoire to keep cash flow moving or an inevitable result of unforeseen circumstances, Inventory Planner’s accurate forecasting and reliable ordering recommendations can make sure they don’t become problematic.
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