What is Backordering in Materials Management?
Imagine yourself making huge sales. The rate at which the products are flying off your shelves is so fast that you can’t match their demand. What happens next? Do you stop selling? You can’t afford to disappoint your customers, lose them to your competitor and spoil your sales. Not at all. To avoid that, you use backorder.
What is Backordering?
Backordering is allowing your customers to place their orders even when you don’t have enough stock at hand or orders you can’t fulfill. A business implements backorder when abrupt sales increase, meaning products are sold faster than they are stocked. It’s a big dream for any company and a massive problem if you don’t have the tactics to handle it.
A sudden increase in sales forces the business to face a surge in demand. If the business uses a just-in-time inventory management strategy where they receive goods when on-demand, they’ll regularly have products back-ordered. An accurate prediction of customer demand in a certain amount of time is vital. Backordering in such a situation is crucial and essential to sustain the operations of the business.
In some cases, the customer initiates the backorder, especially if the item is for seasonal demands. Such preordering falls into the back ordering zone.
If you operate an eCommerce store, improve your inventory management and establish a good customer experience by reducing or handling backorders appropriately.
What are Backorders?
A backorder is ordering services or goods that are currently out of stock due to unavailable supply. The product might not be held up in the company’s inventory but could be in production, or still, the company needs to manufacture the item. When you allow a product to be back-ordered, it means you buy the item, but you receive it at a later date once it’s available.
Backorder indicates that the company’s product demand outweighs the supply. It’s also referred to as the company’s backlog. The backorder’s nature and the quantity affect the time taken before you finally receive your ordered item. The more the items are back-ordered, the more their demand.
Backorders symbolize any stock amount the customers have ordered from the company but haven’t received it due to its unavailability. A lack of supply of an item doesn’t mean the company can’t transact on backorder. The company can still operate even if there’s no inventory in the books. Keeping inventory on backorder boosts demand, increases and retains the customers, and adds value to the products.
What is a Backordered Item?
Backordered items are termed pre-sold goods to the respective shoppers and are delivered promptly.
Popular items could sell fast and be on backorder temporarily. It means the shipment is on the way to restock the stores. The product is sent to the customer immediately after it’s received. The promise to fulfill contains a shipping date that the customer accepts to wait. The customer is notified through a shipment confirmation email when the backorder product has been shipped.
Depending on the understanding with the supplier, a business may drop ship the items. The fulfillment speed increases significantly, improving customer experience. If a specific item is selling in high volume, creating shortages, you should consider extensive recourse bypassing the typical purchase cycle.
What Backorder Means
Allowing a product to be back ordered means the customer can now purchase the item and receive it later.
If an order has a back-ordered item, it won’t be packed for immediate shipment because of the unavailability of a physical inventory item at the moment. If other items in that same order are in stock, the order could be split and shipment done in phases.
Inventory Management Analysis
Backorders are a significant consideration in inventory management analysis. The number of products on back order and the time is taken to deliver the customer orders shed light on how a business can manage its inventory.
If the orders are relatively manageable within a short turnaround time is an indication the business is performing well. Large back orders and long wait times could be problematic. Businesses with manageable backorders retain a high demand, while those that don’t keep up lose their customers.
Accounting for Backorders
It might not be feasible for a small retailer to risk overstocking by purchasing more stock. With the correct analytics, it’s likely predictable how a product will sell. Even when operating a cloud inventory management system, unexpected demand surges could likely occur, and you run out of stock. Making a sale is tempting, while the truth is you could be out of stock, disappointing your customers if not well informed that the product they want to buy will take unusually long to deliver.
Backorders need exceptional accounting. A company should inform the customer that the item ordered is a backorder immediately after the order is placed and the expected delivery time. To avoid the cancellation of orders, the company should contact the customer whenever a problem with fulfilling the backorder arises.
The sale should be recorded in the books as a backorder and not a completed sale. In case the customer cancels the order, it won’t affect the bottom line of the company. Orders are then placed with the manufacturer to avail of the goods. On receiving the shipment, the company searches for purchase orders and follows up on delivery. The sale is then recorded and checked off as complete.
Why are Backorders Generated?
Backordering pressurizes the chain of supply by testing its responsiveness. Unprecedented demand surges could occur. Despite sophisticated sales forecasting, it’s hard to predict demand surges in several cases accurately. They are inevitable. Online stores depend on predetermined strategies that encash them optimally.
Backorders occur due to several reasons. Some are out of control, while others are preventable.
Endorsements such as influencer or affiliate marketing could initiate a sudden demand for your items. Your marketing activities should be in harmony with the supply chain to ensure optimal inventory levels.
If a company doesn’t track inventory movement or appropriate stock levels aren’t maintained, surprises are expected to happen. To optimize your operations, you should have good visibility of the inventory.
Lack of enough options to source products or inadequate vendor management programs is a major reason for backorder. For example, if your vendor doesn’t deliver products as scheduled, you will handle back ordering chaotically even when demand patterns haven’t adjusted. You could lose your shoppers to your competitors.
Importance of Backordering
The term backorder could draw negative images, but to the businesses, there are essential benefits. Backordering increases your business sales without losing your customers to your competitors.
When you have reliable suppliers operating your company with backorders works well. You start by taking backorders from the displayed products of your website. After you’ve accumulated enough orders, it’s time to order from the supplier. It allows you to offer various products at a low cost. Dropshipping the backorders to the customers further reduces the waiting time as this will be done by the supplier.
Furniture usually consists of bulky and big items whose holding cost is high. Rather than incurring such significant carrying costs, you could inform your customers that delivery time varies from item to item. You only need to retain a small number of popular items for immediate sale.
Customers need not know that you run your business on backorders. Only establishing the products might take some time to arrive. Most customers accept, especially if dealing with large-ticket items.
You shouldn’t lose your customers because of backorders. If customers encounter something unpleasant such as long transit times, costly shipping, cart abandonment, of stock items, you risk losing them. They could navigate to your competitor’s website within no time.
Such back ordering benefits include:
Backordering involves passing on the shopper’s order to your supplier, making it easy to accommodate customized requests. For example, a business could offer an option to the shoppers to build their own motorcycles. Instead of a standing product, back ordering is a convenient business decision and an appealing selling point to the customer.
- Reduced Cost
Stocking a large supply calls for enough storage space and a lot of money. A business without a storage center needs to pay for carrying costs. Retaining small stock in supply and backorders eliminates the need for extra storage, services required to store the inventory, and risk, therefore, cutting costs. The reduced cost could be passed to the customers, especially when demand and sales for an item are high.
- Increased Brand Value and Product
Various technology-intensive companies are assisted by back ordering as a marketing gimmick to improve a product’s value in customers’ eyes. High backorders number show the strategy helps to increase the desire and curiosity of the customer.
- Reduction in Waste
Backordering decreases wasted products. The short turnaround time means products have little time to be damaged or obsolete. For example, if you retail air conditioners every summer, there is a demand surge. The unsold items in winter could be upstaged by new models or get damaged by next winter. You wouldn’t want to remain with unsold units. Backordering meets summer demand with low risk.
If the business continually transacts in backorders, this could be seen as a sign that its operations are very lean. It might further mean it’s losing business for not availing the items demanded by the customers. If a customer always gets products on backorder, they might decide to cancel the orders. The company is forced to issue refunds leading to readjusting their books.
How Backordering Works
To understand the backorder process, we compare an order fulfilled with products in stock and where products are out of stock and have to be back ordered.
Order fulfillment process where products ordered are in stock:
- The shopper places an order for the product.
- The product sales order is generated.
- Match the product in the inventory with the sales order.
- Ship the item to the customer to complete the order.
Order fulfillment process in a back ordering scenario:
- The shopper places an order for an out-of-stock product.
- Open a backorder for the product converting it to a purchase order to the vendor.
- Send the purchase order to the vendor.
- The vendor fulfills the order. When the item is finally in your store, please ship it to the customer fulfilling the order.
Backordering is relatively more straightforward if dealing with one out-of-stock product. But when dealing with various products out of stock or relying on backorder as the primary inventory strategy, you should match every purchase order with the right sales order before you start your order fulfillment process.
The process worsens when you have many out-of-stock products that are from separate suppliers. To successfully manage incoming products and outgoing sales simultaneously, you should have an inventory management system that matches your purchases and sales orders well.
Backordering will help you maintain your customers by ensuring that sales are operating well, even with less stock. When you have several backorders and are experiencing operational difficulties in consolidating the purchase orders to fulfill the backorders, spreadsheets won’t be useful. It would be beneficial to consider an efficient inventory management system that automatically manages all your backorders.
Provide a separate landing page where customers conveniently order products that take a while to deliver. State the estimated delivery time and communicate any changes immediately.
Good Customer Service
Good customer service and backorders will be a successful business strategy for you. The bottom line is to manage your customer expectations despite the size or type of the item. The bigger the value of the item, whether monetarily or physically, the more the customer’s delivery tolerance is expected. Acceptable practices and the right tools manage such situations efficiently, meeting market demands.
After all, it sounds like asking the customers to pay in advance for their items, makes them naturally worried. They’ll always ask for updates. Lack of communication and date slippage is not forgivable by the customers. Communicate in good time and apologize in case of a delay.
Backordering could be misunderstood in terms of management, but it shows the value of your brand. It’s a message that you dominate the market, and customers opt for waiting for your product instead of buying similar items from the competitors. Strike the appropriate balance between the shoppers waiting eagerness and frustrating them by waiting too much.