Seeing that an item is on backorder can inconvenience and frustrate shoppers who are used to instant gratification and quick shipping, but in the fast-paced world of ecommerce, it's a logistical problem that seems unavoidable. Fortunately, careful planning and a strategic business model can make inventory management more manageable. Learn more about what a backorder is, how it occurs, and what you can do to minimize its impact on your ecommerce business.
A backorder is an order placed for an out-of-supply product. Your product might currently be in production or on order from the manufacturer. Whatever the case might be, you don't have any physical inventory to ship to customers.
Instead of making the product unavailable, you can put it on backorder. That means that shoppers can still purchase the item. In doing so, they get a guarantee that it will ship once it does become available. Think of it as a waitlist.
Some companies refer to this concept as backlog. You might also see the item categorized as "on order" or "awaiting replenishment." Either way, the idea is the same.
Offering unavailable items come with advantages and disadvantages. On the one hand, it can be a friction point for customers. Cancellations are inevitable as shoppers will have to wait longer to get their items. However, they can also increase demand, keep customers engaged, and create more value for the product.
In retail, many will use these two terms interchangeably. However, they hold different meanings and reflect specific plans for a product. You already know the meaning of backorder—an item you're still selling despite the lack of physical inventory.
Out-of-stock items aren't available either. The difference is that you don't have any current plans to make it available for purchase again. You might be considering discontinuing the item entirely, or you may not have plans to put it back into production just yet.
Those plans can change later, but for now, the item is unavailable for purchase. That's the most significant distinction between these two concepts. With a backorder, getting more inventory is in the pipeline. It might take some time, but customers will eventually get their order.
With out-of-stock items, you aren’t predicting if or when that product will come back in stock, so customers can't place an order for it.
Ecommerce can be unpredictable, and backorders are a fantastic way to hold customers over until you can get more stock. But why does it occur in the first place? Here are a few common causes:
Safety stock can be the thing that bridges the gap between supply and demand. It's excess product stock you put away for the sole purpose of covering supply emergencies. It's there to provide peace of mind and prevent products from becoming unavailable.
We won't get into safety stock calculations here, but miscalculations in safety stock are a common cause of backorders.
Reputable manufacturers and suppliers typically run like well-oiled machines: they're reliable and usually deliver orders on time. Occasionally, even the best manufacturers can fail to meet production goals.
If this happens, there’s no other choice but to wait or go to competitors capable of meeting your production goals in those instances. Either way, delays will occur.
Unexpected weather events, bottlenecks at port terminals, and other unforeseen circumstances can set inventory shipments back several days or weeks.
Sometimes, backorders are a result of booming demand. You might be lucky enough to experience this after a surge of exposure from a news article, TV appearance, celebrity endorsement, social media, or the holidays.
While more orders are great news for your business, the sudden visibility can throw off your inventory calculations and leave you short on product.
No matter the cause, sudden stock issues can be a massive headache. The unavailability of high-demand products can harm your business and cause you to lose customers. Luckily, you can take steps to mitigate this problem.
The viability of this tip depends on your available storage space and capital. If you can swing it, consider ordering more product to have on hand. Take a step back and look at back-ordered products: if this is a regular issue you have to deal with, it indicates a problem with inventory management.
Redo the numbers and make sure that your orders are big enough to meet demand. Research sales potential before product launches and request as much as you can reasonably afford and store.
It pays to have generous safety stock on hand. When you forecast demand, order excess inventory to cover all of your bases. Having that extra supply makes all the difference and avoids shipping delays for customers.
Supply chain issues are some of the most difficult to overcome. Having more than one manufacturer and supplier is the best way to prevent delays. When one has problems meeting goals, you can turn to the other to make up the difference.
This tip sounds obvious, but it's worth mentioning. Continually monitor your inventory and focus on popular products. Keep a close eye on stock levels and use that information to make strategic purchase order decisions.
Finally, set your reorder points strategically to avoid delays. The reorder point is the minimum stock threshold that triggers a purchase order from the manufacturer. The best course of action is monitoring stock, forecasting sales, and frequently recalculating the reorder.
Look at your lead time demand and safety stock to determine the reorder points. Take promotions, product launches, and media coverage into account. Then, investigate historical order data to make purchase order decisions covering all sales scenarios.
If you’re looking for a new, trustworthy supplier or hit an unexpected delay, use your network. 3PLs and 4PLs often have connections and years of experience that can help your business navigate these challenges.
“Orders have so far doubled every month since I launched, and during the holidays our volume spiked, shipping in one weekend what we used to do over a couple of months. Luckily, my approach to fulfillment hasn’t had to change because it was already set up to scale on day one.” – Torie Tilley, founder of Common Era
From a customer standpoint, backorders go against the traditional online shopping experience. Ecommerce is about instant gratification, roadblocks like backorders can dampen the experience.
Backordered products can cost you business. It makes shoppers rethink impulse purchases and often leads to cart abandonment. The long wait could drive them to a competitor, and even if they make a purchase from you, there's always the chance of cancellation.
While some good can come from the increased demand, delays like this can be a customer service nightmare.
The best way to hold customers over is to communicate often. Provide a realistic timeframe and consider setting up an email list to notify them of restocks. Stay in touch with your customers, and use the wait time to build excitement.
Being strategic can turn backorders into a more positive experience, but you must take steps to keep those lines of communication open and set realistic expectations.
Airhouse is an all-in-one logistics platform that can help you manage order fulfillment and inventory. With Airhouse, you can stay on top of your current stock, relocate units across several warehouses, and more. Our platform even lets you queue backorders to avoid fulfillment hiccups.
Reach out to one of our fulfillment experts today to see how Airhouse can help your ecommerce business grow.
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