What is a backorder? Backorders, also spelt ‘back orders,’ are orders placed by your customers for products that are currently out of stock.
In some contexts, backorder issues are a sign of success.
However, if you aren’t equipped with the logistical expertise to execute inventory management or modify your supply chain, your business could be in trouble, and your customer satisfaction could suffer.
As a business, the primary objective is to sell.
It may seem relatively obvious, but there are several moving parts to consider when implementing your shipping and production strategies. While revenue generation is what drives your bottom line, it’s keeping your customers happy that should be at the forefront of your business’s motivations.
Backordered items can quickly turn from bittersweet to just plain bitter quite quickly in the eyes of your clients.
As such, it’s crucial to understand what causes backorders, their issues, how to solve them, and, ultimately, how to plan for back-ordering.
Today, we’re teaching you how to beat the backorder blues!
What Does Backorder Mean? What Are Backorders?
First things first, let’s establish a reliable backorder definition.
Essentially, a backorder happens when customers order something from your business that your supplier does not have in their inventory or that your manufacturer has yet to produce.
To some, this may communicate as running out of stock.
However, there is a subtle difference.
Running out of stock implies you don’t have an item available in your inventory, nor do you have an estimated date for when you will receive the new replacement stock.
Differentially, when an item is on backorder, the supplier or vendor doesn’t have it.
In other words, you or your supplier must communicate this need to the manufacturer, specifically, to make more. Often, this leads to longer lead times.
For those not already aware, ‘lead time‘ refers to the total duration of time it takes to create a product from start to finish, package it, and deliver it to a consumer.
As a business owner, if you receive your products from the manufacturer directly, this time increases because you have to wait for the manufacturer to produce the desired amount.
Many companies may still sell products currently out of stock for consumers by offering a guaranteed shipment date once their inventory is available again.
As such, the item is on ‘backorder,’ meaning people can buy it now and receive it at a later date.
Backorder should also not be confused with deadstock, which refers to inventory that doesn’t sell, with a lower to minimal likelihood of selling in the future.
Typically, deadstock inventory consists of items that have experienced a lower purchasing demand for an extended period, either because they’ve fallen out of favour or are no longer popular.
In this way, they are unlikely to sell independently, meaning their product life cycle continues to become increasingly shorter over time.
Out-of-stock and deadstock are entirely unavailable or individually unsellable items.
In contrast, backorder implies that the product(s) are still in demand but might take a while to restock. The critical difference is the anticipation of a determined endgame in which the products will be available once more, albeit at a later date.
How Does Backorder Impact a Business’s Supply Chain?
To understand the impacts of backorder behaviours on your business’s supply chain, we need to define a phenomenon known as the bullwhip effect.
Essentially, the bullwhip effect, also sometimes known as the Forrester effect, refers to how supply chains either over or under-react to changes in customer demand.
In other words, it’s a concept used to explain inventory fluctuations or inefficient allocations of resources due to demand changes.
For example, say your business experiences a 10% increase in customer demand.
Your suppliers and manufacturers across your supply chain may overcompensate by operating as though the demand has increased by 50%.
Typically, this overreaction results in overproduction and excess inventory. However, this concept can work both ways.
If your business reports a decrease of 10% in customer demand, the same manufacturers and suppliers throughout the same supply chain could react as if the demand has gone down by 50%.
This reaction could result in underproduction, becoming out of stock and subsequent poor customer service.
The reference to a bullwhip represents how a small action on one end can stimulate a more significant effect throughout the length of the whip. So, one small motion of the person’s wrist represents the custom order.
Throughout the length of the rest of the whip, the waves get bigger and bigger, representing the supply chain partners and their reactions to the initial movement.
What Causes Backorders?
There is no one be-all, end-all reason for backorders to occur. They can happen for a multitude of reasons, some within your control and some that are not, including:
Typically for the prolonged success of a business, you want to maintain a relatively steady rate of demand. However, this isn’t always possible. That said, if the demand for a specific item or product, or if the demand for e-Commerce shipping is irregularly high, it could result in backorders.
The reason for this could come from many places.
For instance, it could be seasonal, such as increased demand for particular items during Christmas, Halloween or New Year’s celebrations.
However, it could also be due to something less expected, such as a contest marketing campaign, influencer marketing, or celebrity promotion of a product to their substantial following, causing an influx of new sales and increased visibility on your brand.
Low Safety Stock
The term ‘safety stock’ refers to excess product that businesses keep around should an unexpected occasion arise, such as unforeseen obstructions of the supply chain, where less inventory is immediately available. In this way, it serves as a safety net to address demand.
However, suppose this safety stock is not available or miscounted. In that case, you may experience backorders due to not having enough stock to address regular or increased demand, such as in the case outlined above.
Problems with Manufacturing or Suppliers
Several issues may arise with manufacturing or suppliers that could hinder production rates and result in backorders.
For instance, manufacturers could run out of the necessary materials on hand to create a particular product or item. Or, the supply or manufacturing facilities are shut down for an extended period of time, either for holidays, maintenance and repairs, or other reasons.
These hindrances often result in missed targets and delayed production times, often resulting in your physical or e-Commerce store experiencing backorders.
Backorder Processing – Backording Issues & How to Solve Them
It’s safe to say that backorders are far from the ideal scenario. However, the world of business is often turbulent, unpredictable and subject to change.
That said, there are inventory management techniques to weather the storm and reduce the likelihood of backordered items becoming a problem.
Backorder Cause: Influx in Demand
There are several reasons for unpredictable influxes in demand: a sudden burst of exposure, a resurgence of a popular trend, or seasonal popularity. However, any of these could result in a sudden increase in demand for any given product, resulting in backorder.
Backorder Solution: Establish Safety Stock
As we outlined before, safety stock refers to excess products that companies keep around to help address any unexpected surges in demand.
Digital stores and e-Commerce retailers, especially, need to have reliable inventory management software that can accurately account for the stock levels of these products in real-time to avoid any potential issues that could be detrimental to customer satisfaction.
Within these inventory management software programs, you can forecast demand to the best of your ability to help establish a healthy safety stock that is high enough to address any influxes in demand.
However, it’s crucial to keep a consistent eye on these numbers. Establishing a reliable safety stock supply allows you to be proactive in replenishing stuck should it run low and help eliminate the risk of running out of any particular product, especially your most popular ones.
Backorder Cause: Discrepancies in the Inventory Management Software
While we’d all like to think that technology is 100% reliable, it isn’t.
Suppose the management system you implemented to maintain your inventory and subsequent safety stock is providing inaccurate data, such as your business having the appropriate units to address demand or last through another reorder cycle when it actually doesn’t.
In that case, that could pose substantial issues that generate an increased amount of backordered items.
Backorder Solution: Conduct Physical Inventory Checks
In these cases, business owners, manufacturers, and suppliers should take a two-tiered approach that encompasses both the digital system and physical inventory checks.
If there are proven issues within the digital management system, these physical checks are that much more pertinent until you can determine the source of the error and rectify it.
When it comes to supplying demand, it is crucial to remain on top of your inventory and know what you currently have and what you need with as much certainty as possible.
Of course, this inventory reliance is directly dependent on the particular industry. For instance, some businesses may sustain running out of stock, while others have less flexibility for accumulating backorders and the costs associated with it.
Backorder Cause: Interruptions of the Supply Chain
The world of supply and manufacturing industries is unpredictable. Issues could arise at a moment’s notice that’ll hinder your ability to manufacture products and provide your customers with prompt deliveries of their desired products.
Backorder Solution: Conduct Open Communication with Supply Chain Partners
Maintaining a constant flow of communication between your business and the various suppliers and manufacturers within your supply chain is crucial to remain ahead of any potential issues that may arise.
For instance, certain external factors, such as seasonal holidays, adverse weather conditions or even mandatory facility maintenance and repairs, may arise that could impede a manufacturer’s productivity or ability to generate supply.
In these circumstances, it is their responsibility to share this information with their other supply chain partners.
Facilitating this open communication is crucial to allow other partners ample time to adjust their order or shipment strategies accordingly to face these obstacles, whether that entails communicating these updates to customers or tapping into reserve safety stock.
How to Plan for Backordering
If you’re in a situation where your business is facing backorders, there are methods to ride it out while maintaining the satisfaction of your customers. Ultimately, it comes down to honest communication and advanced preparedness.
Establish a Management System That Generates Real-Time Stock Data
One of the most effective methods for anticipating backorder situations is establishing reliable software to accurately track your inventory rates and amounts as close to real-time as possible. These key insights can provide other warehouse operations with the necessary information to help avoid stock and backorder issues.
In other words, implement a system that alerts you ahead of time when particular stock numbers are running low. This approach will grant the time necessary to be proactive in replenishing those items before you unexpectedly discover you’ve run out on your own and it becomes a more significant issue.
Update Your Customers Accordingly
If you’ve learned that you are running low or completely out of any given product, notify your customers as soon as you find out.
However, it’s also crucial to inform them of a specific date they can expect the inventory to be back up and running and available again.
When it comes to customer satisfaction and retaining your client base, communication is critical. It’s alright to be honest when you’re out of something. In many instances, customers will take it as a sign that the product is high quality and in demand.
The last thing you want is for customers to be excited about purchasing something and going through the motions of making a purchase only to discover at checkout that the item is unavailable. A practical method for navigating this is setting up an email list that notifies customers when items are sold out or back in stock.
Email lists also serve as a valuable marketing tool to boost engagement and build excitement surrounding specific releases and returns by generating a sense of urgency.
Have a Backup Plan in Place
Even with the most genuine intentions, accurate planning and advanced foresight, you can still run into backorder issues. However, you can easily maneuver these obstacles by having an already established, reliable backup plan in place for any such occasion.
There are many unpredictabilities in the world of retail and e-Commerce. Anything from increased demand to unreliable vendors or sudden unexpected closures, or even freak weather events could result in your business accumulating backorders.
Like a good Scout, it’s important to always be prepared. Examples of backup plans could include having a reliable cushion of safety stock to address any interruptions in the supply chain or diversifying your suppliers and manufacturers.
The latter refers to having multiple vendors to ensure there are more hands in the pot to accommodate any potential shortcomings or unforeseen circumstances.
Either way, it’s crucial to expect the unexpected and try to generate solutions for all the issues you can think of, so you’re appropriately prepared for if they do arise.
Backorder Doesn’t Have to Be a Bummer
There are several reasons why backorder may arise. However, it’s how you deal with it that counts the most.
It’s crucial to do your best to anticipate any potential backorder obstacles that could arise to have plans in place to confront them or pivot your strategy, be they manufacturing, supply or demand-related.
When it comes down to it, communication is the critical factor.
This sentiment relates to maintaining constant communication with every partner in your supply chain. However, it also extends to your customers who are put in a position where they are paying for products in advance without receiving them right away.
As always, honesty is the best policy, and remaining as transparent as possible in both of these instances is the best approach to ensure a streamlined approach while also maintaining high levels of customer satisfaction.
Backorders are difficult to deal with but your deliveries don’t have to be. Sign up with Cantec Couriers today to start delivering with ease today!