Dealing with Backorders

Dealing with Backorders

What is a backorder?

By definition, a backorder exists when there is a promise to fulfill an order which has not yet been fulfilled. In that case, a backorder is essentially a strategy allowing businesses to sell inventory, despite not having stock on-hand.

Why do businesses use backorders?

Backorders are implemented for a number of different reasons, the most common being an inequality in levels of supply and expected demand. Sometimes businesses incorrectly anticipate consumer demand to be less than it actually is. When a surge in demand occurs, backorders allow customers to continue placing orders, meaning businesses can continue to sell product.

For other businesses, backorder purchase options are intentionally used to generate hype and exclusivity, particularly for new product releases.

How to handle backorders?

Keep customers informed: give an ETA on the product, update the website ASAP with accurate information, encourage a discussion if customer’s have questions or concerns.

Consider offering an incentive if you’re worried about losing sales: free shipping, discount etc.

Choose how you want to fulfill the order (and tell the customer): offer to partial ship OR ship the whole order once the product arrives.

If it happens often, consider re-evaluating your stock management systems (perhaps by switching to a more efficient CRM-stock management product) and automating as much as possible based on historic data.

What are the issues with backordering?

Customers may abandon their order and decide not to purchase – this may continue into the future if the backorder is not made transparent initially.

Reduced revenues: both in the short and long term. In the short term, backorders will contain unprocessed payments for products that have not been fulfilled – revenues may need to be recorded in different periods. In the long term, customers who have been deterred from purchase may continue to take their business elsewhere – reducing long term revenues.

Extra shipping costs: if the products are shipped in two batches, you’ll need to choose how to absorb this cost.

What are the benefits of backordering?

Guaranteed sales that you can fulfill at a later date.

Data for future inventory purchases and better consolidation of inventory management systems (CRM stock control) and marketing.

Creates hype by promoting a sense of exclusivity – people want what they cannot have.

How to track and optimise stock levels?

Collect real time data.

Make predictions using historical data.

Have a back-up (e.g. extra vendors who can fulfill orders).

Automate inventory systems (or CRM stock management processes) with triggers and cues so the ordering process completes without involvement.