Backorders — an inconvenience in our gotta-have-it-now world. Faced with an out-of-stock notification, many consumers will simply click over to a competitor’s site. For some retailers, the answer is to use backorders, where a desired item that is still in production but currently out of stock is promised to ship in a set timeframe.
The customer gets the item, the retailer makes the sale. Win/win.
Backorders can be tricky, though. If you end up being unable to fulfil the order, the customer may be more irritated than if you had just marked the item as out of stock. And, managing backorders can be a headache for finance and logistics teams.
So are backorders right for your business? Maybe. Let’s find out.
What Is Backorder?
An item on backorder is an out-of-stock product that is expected to be delivered by a certain date once it is back in stock. Businesses will often still sell products on backorder with the guarantee to ship them to the buyer once their inventory has been replenished.
Backordering an item means the shopper can buy the item now and receive it at a future date when the item is in stock and available. When an order contains a backordered item, it can’t be packed and shipped immediately given the lack of physical inventory at the time.
If there are other items in the same order that are in stock, the order may be split and shipped at different times, with the back-ordered items being shipped at a later date.
How Backorders Work
When a company takes orders — and potentially payments — for products that are not in stock, it is accepting backorders.
Once backorders are accepted, the inventory management system converts them to purchase orders and sends them to the appropriate internal department, vendor or distributor. Customer service teams should provide buyers with an estimate of when they can expect their orders and how payment will be handled.
Retailers may choose to have the supplier drop ship items directly to customers, or the retailer may take delivery of the items, translate the backorders to sales orders and ship the items to customers after charging the customer’s account, if applicable.
For a limited number of SKUs at a manageable volume, this is not an overly complex process. Problems mount, however, when the number or quantity of back ordered products multiply or when retailers have a lot of manual order processes and must match each purchase order with a current sales order when completing the fulfilment process.
What causes backorders?
Several internal and external factors can cause backorders, including:
Supply chain issues
Even now, many supply chains are still experiencing or recovering from disruptions that originated during the COVID-19 pandemic lockdowns and have been exacerbated by environmental factors and global conflicts. Such supply chain issues can delay the production, transportation, or delivery of goods and affect your ability to fulfil orders on time.
Fluctuations in demand
Backorders may be caused by unusual demand for a particular product. Everything from a marketing campaign going viral to an extreme weather event could generate an unplanned spike in demand.
Inventory management
How you choose to manage inventory can influence backorders. If you keep minimal inventory or run a dropshipping business, you will likely have to manage and fulfil backorders as a tradeoff for low to zero warehouse costs. You might prefer to keep extra stock, also known as safety stock, as a way to cushion your orders from supply chain disruptions and demand shifts.
Backorder vs. out-of-stock
Out of stock means that a product does not currently have any inventory available and does not have a date for resupply, while ‘back ordered’ implies there is a determined date for products to arrive.
It’s the difference between “This item is currently unavailable” and “This item won’t ship [until 2 weeks from now, for 10 business days, etc. ]. ” In other words, there is hope in the foreseeable future with a backorder. It might take a while, but you will receive the product.
When a product is ‘out of stock, ’ there’s a chance that’s the case permanently, or at least will be for so long that the seller can’t predict when they will have it again.
Benefits Of Offering Items On Backorder
Providing a backorder purchasing option can benefit a business in multiple ways, including:
Increases a product’s overall value
If there’s high demand among customers for a particular item, its economic value often rises. By allowing backorders, a company can increase its revenue.
Improves a company’s cash flow
A process for backorders can help a company optimize the amount of stock in its inventory, reducing costs. As a result, companies can use the revenue for other profitable ventures.
Reduces storage costs
Customers often buy an item on backorder immediately or request its shipment, meaning it can bypass storage entirely. This option allows companies to reduce warehouse management expenses.
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 fulfilment, 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.
Tips For Minimizing Backorders
The following tips can help you minimize backorders:
Communicate with supply chain agents
It’s important to maintain consistent contact with key individuals in a supply chain to gain more information and inform customers. Consider meeting with each agent to determine a viable schedule for backorder requests. After processing a backorder purchase, verify the order date and check in about any potential issues regularly.
Review sales data to predict a product demand
You can research customer habits and patterns to learn which seasons correspond to certain product demands. For example, customers may purchase more notebook supplies in the fall when many schools begin their semesters. Consider investing in developing a high-quality system for market research to learn about a company’s clientele and conduct data analysis.
Calculate an inventory’s reorder point
The ROP represents the minimum amount of stock in an inventory before the next ordering process occurs. Measuring a different ROP for each product can help a company reduce backorders because retailers can predict the most suitable time to offer in-stock items.
This value involves calculating a product’s lead time demand, which describes the time a company estimates to replenish its inventory when a customer orders an item and identifies an optimal amount of safety stock. To find the ROP, you can add the resulting values.
FAQ: What Is Backorder?
What is a partial backorder?
A partial backorder refers to when only part of an order is not in stock. When partial backorders happen, a business can either split the shipment (i. e. , ship the in-stock items immediately, and ship the backordered items later on), or they can postpone shipping the order until all of the items are available.
Can backorders be avoided?
Accepting backorders is ultimately a business decision, but you can avoid them in several ways. Manage product inventory and keep higher stock levels, or safety stock, to prevent items from going out of stock. You can also choose not to offer backorders, so when a product sells out or goes out of stock, customers will no longer be able to order it from you.
What does “rolling backorder” mean?
A rolling backorder is essentially the same thing as a regular backorder. Sometimes, the term rolling backorder is used to refer to backorders that do not have a definite delivery date or use a ‘rolling’ window of time for a more flexible timeline commitment.
Conclusion
Backorders can be both a blessing and a curse for businesses. On one hand, they indicate high demand for a product, which is great for sales and revenue. However, backorders can also lead to customer dissatisfaction if not managed properly. Businesses need to understand the causes, advantages, and disadvantages of backorders to effectively prevent them or minimize their impact.
By implementing strategies such as effective inventory management, clear communication with customers, and proactive measures to prevent stockouts, businesses can navigate the challenges of backorders and maintain customer satisfaction.
So, whether you’re a business owner or a customer waiting for an item on backorder, understanding the ins and outs of backorders is key to ensuring a smooth shopping experience. Need a helping hand? Qodenext can lend you that.
