This guide is to help you understand backorders, how to avoid having situations when you have to unexpectedly backorder items and how to handle the backordering process effectively.
What does ‘Backorder’ mean?
A backorder is an order for a product that the seller does not have in stock but has placed on order with their supplier. So, they have “back” ordered it with the supplier.
Some companies will use backordering as a deliberate strategy. The advantage of this being that it enables them to get the profit from the sale without having to have every product they sell in their inventory.
Benefits of Backorders
To a certain extent, backorders do give you some guarantee as to future demand.
Cut costs in stocking
Since there is no safety stock in your warehouse, you can effectively keep warehousing costs down as the items in demand fly right off shelves the moment they are received.
Gives insight into customer buying patterns
Backorders provide a good opportunity to gain market insights into customer buying patterns, which can be used to direct your future sales and marketing strategy.
Cons of Backordering
Your customers may not be happy with delayed shipping
While some customers do not mind waiting for a product to be delivered to them even weeks later, others simply do not accept delayed delivery, and will often switch to a competitor without warning.
Your customers may cancel
As a result, you may run into cancellations – typically from irate and generally impatient customers who won’t take “no” for an answer or refuse to entertain reasons for delays, no matter how genuine they may be.
It may put more pressure on your customer service team
You can expect your customer service representatives to get really busy and cope with more pressure than usual, trying to keep irate customers calm and reassure them that their item is on the way!
What leads to unexpected backorders?
If backordering products is a businesses strategy that works for you, then that’s great. But sometimes other issues cause the need to backorder products unexpectedly. These issues could be:
Poor inventory control
If you do not have a good understanding of what your current stock levels are for individual products, then you can quickly find yourself in a situation where you either have to say items are out of stock or sell them on backorder. This is more likely if you are using a periodic, rather than a perpetual inventory management system.
Issues with your supplier
Any issues your supplier may have supplying the required goods in the right quantities and at the right time could easily lead to backorder. It’s important to have a solid two-way relationship with your supplier, where they can accurately disclose if an item will be available or not at a specific time.
Poor demand forecasting
Poor demand forecasting is one of the leading causes of backorders. If you cannot accurately forecast the demand for your products you will often find yourself without what you need to meet customer demand. This can be best avoided by having an inventory management solution that can help you accurately track your inventory and forecast demand.
Unexpectedly high sales periods
This one is often hard to avoid. While you may have done everything possible to project high sales periods, at times higher than usual demand often spurs up when you least expect it. For example, a customer wants to pick up 10-12 orders instead of the usual 3-4 – there was no way you could have anticipated that.
Not enough safety stock
Somewhat related to the previous point (as a solution), backorders often pop up due to a lack of ‘safety stock’ – i.e. extra stock for situations where demand is higher than usual or during unexpectedly high sales periods. There’s no harm in having a little extra or safety stock to avoid running into backorders in the above scenarios.
How to avoid unwanted backorders
You can take the following steps to reduce unwanted backorders as much as possible and maybe even eliminate them altogether:
Dynamic demand forecasting
Something as simple as demand forecasting can help you scale back backorders. It involves using your historical data and sales trends to dynamically predict sales and demand in future. For example, as long as you have enough data regarding sales and inventory trends, you can start to connect the dots and find common customer demand and buying patterns – which will allow you to order inventory at the correct levels. Inventory management software is one way to accomplish this. In addition, you must also plan or estimate how many inventory days you expect an item to remain in storage and whether your supplier needs an MOQ (minimum order quantity).
Setting good safety stock levels
The reason warehouses buy safety stock is that it acts as a buffer during shortages or when demand is unusually high – such as an unexpected high sales period (due to whatever foreseeable or unforeseeable reason). When your normal inventory runs out, you can access the safety stock in your storage to meet that demand. Your customers will remain happy as they will be able to avail any ongoing sale without having to wait. An order management specialist in your team can help you monitor stock levels on a regular basis.
Setting reorder points
Reorder points are stock levels at which you reorder supplies. You can manage these manually or through specialist inventory tracking software like Veeqo.
Reorder point formula
The formula is:
(Reorder Point (ROP) = Demand during lead time + safety stock)
The above is a tried-and-true way of determining when to reorder. Here’s what you’ll do:
- Calculate the lead time demand in days (so lead time days X ave daily sales volume)
- Calculate the safety stock in days.
- Sum up the two to arrive at your Reorder Point.
Keeping a clear view on your inventory levels
This largely has to do with having access to real-time reporting on stock levels across all your channels. So, when you have accurate real-time data and reporting on your stock levels you can accomplish:
- Your warehouse team will be notified in a timely manner to restock items, which will dramatically lower any chances of purchase delays (a common cause of backorders), and;
- Customers will be promptly notified at the time of purchase that an item is backordered, helping them decide there and then whether they want to keep it in their carts.
Have more than one supplier
Suppliers also run into peak demand periods and often without warning, even if they have planned beforehand to meet that demand. Therefore, it always helps to work with multiple suppliers to keep your inventory levels stocked. This way, supply chain disruptions with one supplier or manufacturer won’t leave you high and dry. Furthermore, if demand runs unusually high, you can always stock from more than one source to meet backorders as quickly as possible.
How to keep your customers happy when you have to backorder
You may often end up with a lot of backorders on your hands before you know it. Here’s how to keep your customers happy should that be the case:
Make sure your customers are aware
Take the trouble of letting your customers know that an item is backordered, and when they can expect to have it. It’s the least you can do, and it will go a long way to ensure they remain ‘your customer’.
Keep in contact
This may be as simple as sending customers periodic emails or text messages, providing updates at regular intervals to let them know when the backordered item is arriving, or if there will be any changes to the arrival date.
Give realistic timescales
This one says it all: don’t overpromise or under-deliver! If an item is set to arrive in 10 days, don’t tell them they’ll it in 7-8 days! In fact, use this waiting time to build a little anticipation and excitement, sending them product brochures or special offers they can avail. This will bring down your cancellation ratio to almost zero.
Slowing down the supply chain
The further back a backorder is dated, the more problems may pop up in the supply chain.
What is the difference between backorders and being out of stock?
If an item is out of stock it means that the product is not in stock and there is no expected resupply date. Backordered products have a date for resupply.
For a customer, it’s the difference between seeing ‘this product is out of stock’ and ‘this product won’t ship for x days’.
When to use backorders rather than just say a product is out of stock?
Now, with that said, whether you decide to use the term backorder or out of stock to indicate what’s available and what’s not, is dependent on your business model. For example:
- Are your customers willing to wait for a specific item to be delivered at a later date?
- Do you have any systems to actively track backorders?
- In your individual business model, what does it mean for an item to be on “backorder”?
- How are backordered items affecting your inventory management?
In any case, we recommend using the term “backorder” for something which is available but not available right away to own. Use the term “out of stock” when something isn’t available at all to begin with, which means orders cannot be placed for the said item.
Will backorders work for your eCommerce business?
When customers see the dreaded “out of stock” sign next to items they want very badly, they may never return, even if the items are back in stock a few days or weeks later.
So, the question is: will backorders even work for your eCommerce business?
Well, if you’re expecting any backorders or if there is no way around it at the moment, then the first thing you must do is put a proper system in place to let your customers know that an item can be backordered, and that it may take a while for them to receive it.
These customers must be the first ones to get served the moment those items are back in stock. Therefore, keep the lines of communication open with your fulfilment company so that backorders can be quickly processed. Have your customer service team ready to answer any questions during this time. Come up with a proper communications plan (such as email or SMS notifications at regular intervals) to keep customers informed on their backordered item status.
What is a partial backorder?
A partial backorder is when only a part of a specific order is not in stock and the in-stock items are immediately shipped. The partial backordered items are sent once they are in stock. For example, if one of your customers orders a home theatre system and only the TV screen is in stock, you will ship the TV screen and let them know that the other half of the “package” – the audio system, for example – will be sent soon as it becomes available.
Alternatively, you could also hold the in-stock items until the backordered items are back in stock, to ship off the entire package in one go. As before, you will always keep your customer in the loop.
Wether backorders work for your business or not, we hope this guide has helped
- Inventory Management Guide
- Inventory Management Techniques
- Types of Inventory
- Inventory Storage
- Inventory Analysis
- Purchasing Inventory
- Choosing An Inventory Management System
- Inventory Accounting
- Multichannel Inventory Tracking
- Perpetual Inventory Systems
- Inventory Forecasting
- How do to a stocktake
- Understanding Cost of Goods Sold
- What is Cloud-Based Inventory Management Software?
- Understanding Stock Control
- Inventory Reporting