Any retail or eCommerce business relies heavily on inventory. Some things, however, cannot be stocked. Backordering allows you to sell such things even if you don't have them in stock. Backordering has both advantages and disadvantages, which we'll discuss in this article.
Table of contents
- What is a Backorder, Exactly?
- Why Should I Accept Backorders?
- What is the Significance of Backordering?
- Backordering: How to Do It Right
- Managing Backordered Inventory
- It's All About Customer Service When it Comes to Backordering
What is a Backorder, Exactly?
Customers can place purchases with you that you can't fulfill right now, thanks to a backorder. Due to a lack of inventory caused by the company's procurement approach, the order cannot be completed, or the items must be made. Consider it an order backlog.
A big number of backorders indicates that demand for the products is greater than supply. A higher volume of backorders means longer wait times for the product to reach the client. A high number of backorders suggests that an item is popular.
Why Should I Accept Backorders?
Just because you don't have enough goods right now doesn't imply you shouldn't take orders. It's a bit tough, but if the product is good, people will wait and return. Many current eCommerce sites offer things for 'preorder' while they are still being manufactured. As we'll see later, there are several advantages to processing backorders. Backordering is a popular practice in both make-to-order manufacturing and just-in-time inventory management.
Backordering practices put inventory management to the test. It's good to have a small backlog of orders and short turnaround times. However, a high number of backorders in the queue and extended customer wait times indicate that your inventory management isn't up to par.
What is the Significance of Backordering?
Backordering boosts your company's revenue and keeps clients from going to your competition.
It's simple to meet specific requests because backordering requires forwarding the customer's order to your supplier. Customers in the United Kingdom, for example, can build their own Harley-Davidson motorcycles. The company has converted a practical business decision into a compelling selling factor for its clients by using backordering rather than a standing inventory.
Backordering alleviates the issue of product overstocking, lowering warehousing expenses. It allows new stores to spend less on inventory when they first open their doors. It also helps free up capital that might otherwise be encumbered by shares and holding charges. Tesla, for example, likes to keep a smaller inventory and create on demand, lowering the capital and risk associated with excess inventory storage.
3. Less Waste
Backordering decreases squandered inventory because goods have much less time to be damaged or obsolete due to the quicker turnaround. Every summer, for example, if you're a retailer selling air conditioners, you'll see a spike in demand. When winter arrives, though, demand plummets. You don't want to be stuck with unsold units during the winter, as they could be destroyed by the elements or outperformed by the latest ones next summer. You can meet summer demand with much less risk if you use backordering.
4. Product and brand value have both increased.
Backordering is a marketing trick used by some technology-intensive corporations to boost the perceived worth of their products. For example, the Samsung Galaxy S10 5G, one of the first phones to support 5G, is now on backorder in the United Kingdom ahead of its launch. The high amount of backorders indicates that the tactic is working to pique customers' interest and encourage them to buy.
1. Lot size vs. carrying expenses
The number of things acquired or made on a specific date to fulfill a client request is referred to as the lot size. Large batch sizes now raise carrying costs when practicing backordering. If you're in the manufacturing industry, this is especially true. Producing smaller lot sizes in a single manufacturing run may be uneconomical depending on your setup. This creates a dilemma between stockpiling backorders and incurring excessive carrying expenses. Solving such problems is unique to each company, and it is best left to the hands of seasoned manufacturing executives.
2. Lead Time
Lead time refers to the period from placing an order with a supplier and the item arriving at your location. If the items you need to fulfill your backorders have extended lead times, you'll have issues with backorders piling up and customer dissatisfaction. You'll have to incur the risk of raising carrying costs by keeping commodities with exceptionally long lead times to prevent a situation like this . Searching for local suppliers or paying more for faster delivery are two options.
3. Effective inventory control is required
It's easy to get mixed up between various customer purchases and inventory levels because stock is only procured after orders are accepted. As a result, inventory management should be as tight as possible in order to accomplish quick turnaround times.
4. Cancellations of orders
Backorders can build up quickly if you don't have a reliable fulfillment mechanism in place. Customers get dissatisfied and cancel orders as a result of long delays, it goes without saying.
5. Customers may abandon you
Customers are generally ready to wait longer for larger, more complex items, such as machinery or designer furnishings. They will, however, move to another provider if they are constantly delayed and have to cancel their orders.
Backordering: How to Do It Right
Backordering is defined as having orders that you are unable to fulfill or having more orders than you have available stock. It's a dream come true for any company, but it can also be a major headache if you don't know how to deal with it. Take Apple, for instance. Every iPhone they've ever produced has resulted in backorders, with consumers eager to wait. Apple, on the other hand, has an incredible track record of delivering orders on time. Let's have a look at how you may get the same results.
Let's look at the logistical challenge in more detail: One or more goods may be out of stock when you receive a sales order. It's simple if there's only one item out of stock. Simply generate a new purchase request for that single item and notify the buyer when the backordered item arrives. Consider managing dozens, if not hundreds, of separate sales orders in a single day. It's at this point that things start to get a little crazy. Because an out-of-stock item may be scattered across several sales orders, you must combine all out-of-stock products from several sales orders into a single purchase order. Worse, you may have a number of out-of-stock items from various sources - this can be really inconvenient.
The mechanics of dealing with backorders as a retailer is a test of patience in and of itself. Let's take a look at what it takes to fulfill backorders:
1. Keep track of all of your sales orders that include backordered items.
2. Place a purchase order with your supplier for these backordered items.
3. When it arrives, go through your sales orders and make sure they match up with the correct purchase order.
Managing Backordered Inventory
As a small store, purchasing extra merchandise and risking overstocking may not be viable. If you use a cloud inventory management system and have the correct data in place, you can probably forecast how an item will sell. Even then, demand spikes are possible, and you may run out of stock. While it's tempting to make a deal, the reality is that you can end up selling out of stock products, and clients will be unhappy if they aren't notified that their items may take longer to arrive.
One strategy for continuing to sell while keeping customers happy is to make a separate sales page in which you can list all backorders. Having a different backorder page for backordered items allows you to offer items that aren't in stock while also informing your customers that the items they are about to purchase may take longer than usual to arrive.
It's All About Customer Service When it Comes to Backordering
Increased sales and concerned customers are the result of placing a backorder. After all, you're requesting your customers to pay in advance for a product, so they'll be concerned. Customers aren't tolerant when it comes to a lack of communication, therefore they'll demand continuous updates.
If you tell them you'll start shipping on January 28th, every customer who has a product on backorder will be awaiting shipping notices on that day. In their perspective, date slippage and poor communication are unacceptable, thus a good guideline is to avoid these by keeping your consumers informed. If there is a delay, inform your consumers as soon as possible to avoid a deluge of complaints. Send an email, apologize, and provide a new expected arrival time, and you'll avoid enraged customers.
You can quickly handle backorders with a dependable inventory management system, ensuring that your clients aren't kept waiting for long periods of time.
You don't have to miss out on sales because you don't have inventory on hand right now. Backordering, when done correctly, can help you retain consumers while also lowering your costs. Backordering is a successful approach to sell with low carrying costs if you have good inventory management, quick delivery, and clear communication.
Backordering allows you to keep your customers and keep your sales going even if you don't have a lot of inventory on hand. It also benefits your company by lowering expenses, eliminating waste, enhancing the value of your products, and enabling you to offer unique orders. Backordering can be a profitable strategy for your company if you have outstanding customer service and an effective inventory management system.