Backorder: What It Is, Example and How To Manage

Backorders are a common occurrence in retail.

Backorder: What It Is, Example And How To Manage

Backorders are a common occurrence in retail. They happen when an item that a customer orders is not currently in stock and has a delayed delivery date. Backorders can be both a boon and a bane for retailers. On one hand, they allow retailers to keep customers happy by promising to deliver the product once it is back in stock. On the other hand, managing backorders can be a headache for finance and logistics teams. In this guide, we will discuss how to manage backorders effectively and prevent them from happening in the first place.

What are Backorders?

A backorder is generated when an order cannot be fulfilled at the time of purchase because the item is not in the seller’s current inventory. However, the item is still in production or available from the distributor. Backorders generally happen when demand exceeds supply, whether that’s due to a successful marketing campaign or seasonal trends. They could also occur when there is a disruption in the supply chain due to unforeseen circumstances such as extreme weather, challenges with transportation, political upheavals, a shortage of raw materials or a supplier going out of business.

Benefits of Backorders

Backorders may benefit companies in a few ways. Retailers with limited warehouse capacity may not be able to hold a large amount of stock, but if they can confidently track availability of items from suppliers, they can avoid overcrowding and incurring excess storage costs while confidently accepting backorders. Sometimes, companies see an unexpected surge in demand for a product. Again, depending on visibility into availability of additional stock, accepting backorders allows the retailer to make those sales and keep customers happy.

Causes of Backorders

Backorders generally happen when demand exceeds supply. Here are some common causes of backorders:

Unexpected Demand

Backorders can occur when there is an unexpected surge in demand for a product. This could be due to a successful marketing campaign or seasonal trends. For example, a clothing retailer may experience a spike in demand for winter coats during the holiday season, leading to backorders for popular styles or sizes.

Supply Chain Disruptions

A disruption in the supply chain can cause backorders. This could be due to unforeseen circumstances such as extreme weather, challenges with transportation, political upheavals, a shortage of raw materials or a supplier going out of business. This could be caused by extreme weather events, transportation challenges, political upheavals, or other unexpected events that disrupt the flow of goods. For example, a retailer that relies on a single supplier for a key component may face backorders if that supplier experiences a disruption in production or goes out of business.

Manufacturing Delays

Manufacturing delays can also cause backorders. If a manufacturer experiences delays, this can push back the delivery date of the product, causing a backorder. If a manufacturer is unable to produce enough of a product to meet demand, retailers may be forced to accept backorders while they wait for the manufacturer to catch up. This can be especially challenging for businesses that rely on just-in-time inventory management systems.

Managing Backorders

Managing backorders is about balance. Keeping your inventory system working for you is a key part in balancing backorders. Here are some ways to ensure that you are staying ahead of the game:

Choosing Products for Backorders

Decide which products are suitable for backorders. Some products may be easier to manufacture or source than others, so make sure to choose wisely.and focus on the items that are most in demand. Additionally, consider the lead time for manufacturing or sourcing the product and how quickly you can fill the backorder once stock becomes available.

Forecasting Order Demand

Forecast order demand to ensure that you have enough inventory on hand. This can help you avoid backorders altogether. Accurately predicting the demand for your products, you can also optimize your inventory levels, reducing the costs associated with overstocking or understocking. One way to forecast order demand is by analyzing historical sales data and identifying patterns and trends. You can also use market research and customer feedback to gain insights into changing demand patterns and adjust your inventory accordingly.

Additionally, technology solutions such as demand planning software can help automate the forecasting process and provide real-time data analysis to improve accuracy and efficiency. Ultimately, accurate demand forecasting is a critical component of effective inventory management, allowing businesses to stay competitive and meet customer needs while minimizing costs and maximizing profits.

Updating Listings

Keep your listings up-to-date. Make sure that customers are aware of any potential delays or backorders. This will help manage their expectations and prevent frustration. You can also provide regular updates on the status of their orders and any changes in delivery times. Additionally, consider offering alternative products or solutions to customers who may be impacted by delays or backorders. Being proactive and transparent about any issues, you can build trust with your customers and ensure that they have a positive experience with your business. Remember, customer satisfaction is key to building long-term relationships and growing your brand.

Working with Multiple Suppliers

Work with multiple suppliers to ensure that you have a backup plan if one supplier falls through. This can help prevent backorders due to supply chain disruptions or unexpected events such as natural disasters or factory shutdowns. In addition to collaborating with multiple suppliers can provide leverage in terms of negotiating lower prices and better terms. It is crucial to establish strong and transparent relationships with each supplier and communicate regularly to stay informed about any potential issues or changes in the supply chain.

Keeping Customers Informed

Keep your customers informed about the status of their orders. Provide updates on when their products will be shipped or delivered. It’s important to keep customers informed about the status of their backorder. Provide regular updates on estimated delivery dates and any changes to the status of their order. Consider offering incentives such as free shipping or discounts on future purchases to customers who are affected by a backorder.

Keeping a Record

Keep a record of all backorders. This can help you identify any inventory gaps and prevent future backorders.

Shipping Products Separately

Consider shipping products separately if one item is causing a backorder. This can help ensure that the rest of the order is fulfilled in a timely manner and the customer is not kept waiting for the entire shipment. It’s important to communicate effectively with the customer about the situation and provide them with a clear timeline for when they can expect to receive the backordered item. You can also consider offering the customer a discount or free shipping on the delayed item as a gesture of goodwill. By taking these steps, you can minimize the impact of backorders on your business and maintain positive relationships with your customers.

Identifying Inventory Gaps

Identify any inventory gaps and take steps to fill them. This can help prevent future backorders and improve customer satisfaction. One way to identify inventory gaps is to use inventory management software that tracks stock levels and alerts you when items are running low. Another option is to conduct regular physical inventory counts to ensure that the number of items in your system matches what you actually have on hand. Once you’ve identified any gaps, consider ordering additional inventory or adjusting your reorder points to prevent future stock shortages. It’s also important to analyze demand patterns and adjust inventory levels accordingly to ensure that you always have enough stock to meet customer needs.

Measuring Backorders

The backorder rate KPI is a crucial metric for retail businesses, as it measures the percentage of orders that cannot be fulfilled at the time customers place them. A high backorder rate can negatively impact customer satisfaction and retention in the long term. In this guide, we will walk you through the process of calculating the backorder rate in retail.

Calculating the Backorder Rate

To calculate the backorder rate, divide the number of backordered items by the total number of orders placed during a specific period. This will give you a percentage, which represents the proportion of orders that are on backorder.

Step 1: Gather the necessary data To calculate the backorder rate, you will need two pieces of information:

  • The number of undeliverable orders (orders that cannot be fulfilled at the time customers place them)

  • The total number of orders placed during the same period

Step 2: Calculate the backorder rate Use the following formula to calculate the backorder rate:

Backorder Rate = (Number of Undeliverable Orders / Total Number of Orders) x 100

For example, let’s say your retail business received 1,000 orders during a specific period, and 50 of those orders were undeliverable due to stock unavailability. Using the formula above, the backorder rate would be:

Backorder Rate = (50 / 1,000) x 100 = 5%

In this example, the backorder rate is 5%, which means that 5% of the orders placed during the given period could not be fulfilled immediately.

Step 3: Analyze the results

Once you have calculated the backorder rate, it’s essential to analyze the results and identify any potential issues or areas for improvement. A high backorder rate may indicate problems with inventory management, supplier reliability, or demand forecasting. It’s crucial to address these issues to improve customer satisfaction and reduce the likelihood of losing customers due to unfulfilled orders.

Next, you will want to Implement key strategies to reduce the backorder rate, which we will cover below.

Key Strategies for Preventing Backorders

Preventing backorders is crucial to maintaining customer satisfaction and running an efficient retail operation. Here are some key strategies to help you prevent backorders:

Efficient Inventory System

Implement an efficient inventory system that tracks stock levels in real-time. This will allow you to stay ahead of potential backorders and replenish inventory as needed.. One of the most effective ways to implement a real-time inventory system is by using barcode scanning technology. Associating each item with a unique barcode, you can easily track the movement of your inventory as it enters and exits your warehouse or store. Barcode scanners can quickly read these codes, providing accurate data on stock levels as well as product information.

Another way to improve your inventory tracking is by using an automated ordering system that integrates with your inventory management software. This will help you ensure that you always have enough stock on hand to meet demand, without having to manually check inventory levels. You can set up reorder points for each product, your system can automatically generate purchase orders when stock levels fall below a certain threshold.

Effective Backorder Process

Create an effective backorder process that ensures customers are informed about the status of their orders and can make informed decisions about whether to wait for an item or cancel the order.An effective backorder process is crucial to keep customers satisfied and informed about their orders. The first step is to clearly communicate the backorder status and expected delivery date to the customer as soon as possible. This can be done through an automated email that is triggered when the item goes out of stock or through a message on the product page.

Once the order is placed, it’s important to provide regular updates to the customer about the status of their order. This can be done through automated emails or text messages that inform the customer of any changes in the expected delivery date or if the item becomes available earlier than anticipated. Customers should also have the option to cancel their order if they no longer wish to wait for the item.

This can be done either through a self-service portal or by contacting customer service directly. It’s important to make this process as easy and seamless as possible to avoid any frustration or confusion. It’s important to follow up with the customer once the item is back in stock and their order has been fulfilled. This can be done through a survey or feedback form to ensure that the customer was satisfied with the backorder process and to identify any areas for improvement.

Inventory Management Software

Invest in inventory management software that can help you forecast demand, manage supplier relationships, and maintain accurate stock levels. This will help you avoid backorders and keep your customers satisfied while also reducing the costs associated with overstocking. Moreover, with the help of inventory management software, you can easily identify the products that are selling well and those that are not, allowing you to make informed decisions about your business. Some software solutions come with automatic reorder points, which means you’ll never run out of stock for your popular products. With this tool in hand, you can focus on growing your business without worrying about inventory management.

Communication Strategies

Develop clear communication strategies to keep customers informed about potential backorders and provide updates on the status of their orders. This can help manage customer expectations and prevent frustration.and dissatisfaction. One effective way to keep customers informed about potential backorders is by providing them with regular updates via email or text message. These updates should include a clear explanation of the situation, an estimated timeline for when the product will be available again, and any actions that the customer can take if they wish to cancel or modify their order.

Another strategy is to provide customers with alternative options if the product they ordered is not available. This could include offering a similar product, giving them the option to wait until the product is back in stock, or providing a refund if the customer no longer wishes to wait. It’s also important to ensure that customer service representatives are trained to handle inquiries about backorders in a professional and empathetic manner. They should have access to up-to-date information about the status of orders and be able to provide accurate and timely responses to customer inquiries.

Tips for Reducing Backorders

While it may not be possible to eliminate backorders entirely, there are steps you can take to reduce their frequency and minimize their impact on your business. Here are some tips for reducing backorders:

Accurately Forecasting Product Arrival

Work closely with suppliers to accurately forecast when products will arrive at your warehouse. This will allow you to update customers on the expected delivery date and reduce the likelihood of backorders.. Additionally, maintaining a good relationship with suppliers can also help in securing better pricing and faster delivery times for products. It is important to communicate effectively with suppliers and provide them with clear guidelines on your inventory needs.

Regularly reviewing inventory levels and setting up automatic reordering systems can also help in streamlining the supply chain process and reducing the risk of stockouts. Another way to minimize backorders is to offer alternative products or suggest similar items to customers in case the desired product is out of stock. By taking a pro-active approach, retailers can improve customer satisfaction and build a loyal customer base.

Offering Incentives

Offer incentives for customers to wait for backordered items, such as discounts or free shipping. Another way to incentivize customers is by offering them a priority order option for a small fee, which moves their backordered item to the top of the queue. This not only generates additional revenue for your business but also gives customers the peace of mind that their order will be fulfilled sooner rather than later.

Providing Exceptional Customer Service

Ensure that your customer service team is well-trained in handling backorders and can provide clear, accurate information to customers. It’s important to remember that communication is key when it comes to managing backorders, and finding ways to make the waiting process more bearable for customers can help minimize frustration and maintain their satisfaction with your brand. This will help manage customer expectations and keep them happy during the backorder process.

Importance of Managing Backorders for Retailers

Managing backorders can be a challenging aspect of running a retail business, but with the right strategies and tools in place, you can minimize their impact on your operations and customer satisfaction. By carefully selecting products for backorders, forecasting demand, working with multiple suppliers, and maintaining clear communication with customers, you can effectively manage backorders and keep your business running smoothly.

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