What Does Backorder Mean? [Item Management Definitions]
What Does Backorder Mean?
If you’re wondering, “What is a backorder?” then we’re here to help clear things up for you! A backorder is an order for a product that is currently out of stock but will be available at a later date.
Backorders can send mixed signals regarding how well a business is doing. Some companies wear it as a badge of honor because backorders show customers that their products are in high demand. When overdone, however, backorders can also be a sign of more significant problems in the company’s operations.
Today, we’ll discuss questions about this crucial supply chain concept, including “what does backorder mean?” and “how to avoid backorders.”
A Closer Look at Backorders
So, what happens when an item is on backorder? In this case, a customer can choose to pay for the item and receive it at a later, specified date when the product is available to ship.
To define backorder, we need to clear some confusion first. The term is commonly—but mistakenly—used interchangeably with “out of stock.” While the meaning of “out of stock” comes close to the meaning of backorder, the two are separate designations. Sure, they both deal with a situation where a customer can’t buy an item in real time, but there’s a distinct difference.
That difference is the predictability of the item’s expected shipping date. A predetermined schedule is often disclosed when mentioning a backorder, meaning customers will know precisely when they’re going to get the product. That’s why most are willing to pay for the item even if they don’t receive it just yet, especially if the merchant is reputable.
This is in contrast to a true out-of-stock situation where an item is unavailable, and the seller has no idea when it will get restocked, if ever. In the case of out-of-stock merchandise, the item is usually not available for purchase, and may never be replenished.
Are Backorders Good or Bad?
Backorders can be both good and bad for the business. On one hand, a backorder is a better situation than being out of stock. It tells merchants that their product is doing exceedingly well given the demand. And if a customer chooses to pay for a backordered item in advance, the sale is already complete before the merchandise is fulfilled. As most will say, it’s a “good problem to have.”
Apple is an example of a company that does backorders right. Whenever they launch a new iPhone, people will pay and wait patiently for weeks to get their hands on one. It’s a testament to the power of Apple’s brand, but also to backorders as a common selling strategy.
It’s important to note that a backorder can frustrate a customer, especially if it is a regular occurance. Most consumers want their products in hand as soon as possible following their purchase. There’s also the critical time until your product becomes available to consider. During this period, competitors can swoop in and steal a sale away from you.
And, if you get backorders regularly, it can be a sign that you need to work on your inventory management approach.
Causes for Backordered Items
Backorders can happen for a wide variety of reasons, both due to your supply chain or through external factors. Here are a few common reasons:
Sudden Change in Demand
An unusual or sudden change in demand is the top reason back orders occur. There are many factors that can cause this, including something as simple as a tweet or recommendation from a celebrity who endorses the product.
Sometimes, however, even if you anticipate an increase in demand, you might have underestimated your stock levels. For instance, you might have explored a new marketing channel recently, doubling your estimated leads.
If you’ve been following sound inventory control practices, you’ll probably have your stocks at optimal levels for standard sales. But these levels can get disrupted with surprise occurrences. Unfortunately, these sudden surges in demand can be very hard to forecast, resulting in backorders.
Supply Chain Problems
A backorder can be the result of issues with your supply chain. Your supply chain might not have anticipated a sudden surge in demand for their raw materials. This could result in challenges with supplying vendors, leading to decreased output.
Often, however, supply chain problems result from the individual components not communicating with each other properly. One mistake from someone downstream in the chain can cause a ripple effect that will intensify once it reaches you.
For example, say you (the retailer) requested a certain amount of stock from your wholesaler. If the wholesaler is extra cautious, they might order less than what you advised them to, just to be on the safe side. This “ripple effect” will continue from the distributor to the manufacturer. Then when you finally order, you’ll end up only getting a fraction of what you requested. This results in lower stocks and, potentially, backorders.
Insufficient Safety Stocks
Even if the supply chain fails, most companies have an insurance policy to help prevent out-of-stock situations. This is called a safety stock, which is an excess supply of stock used as a buffer for emergencies.
In the face of increasing demand or low supply, safety stocks can help keep you afloat. However, if you don’t accurately estimate the amount of safety stock you’ll need on hand, this too can result in backordered products.
Best practices for backorders
Despite your best efforts, backorders can happen. So the smart thing is to manage them as best as you can. The key is to still provide excellent customer service to keep your clientele happy even as they’re waiting for their items to arrive. It’s simply about making the best of a not-so-ideal situation.
Here are some backorder best practices you can implement in your business right now:
Not Every Product Will Be Suitable For Backorders
Unfortunately, back-ordering doesn’t work well with every product on the market. Generally speaking, the more valuable or high-priced an item is, the more willing the customer is to wait for that product. Hence, why people wait for weeks for the latest iPhone.
If your product is a commodity or if you’re competing in a very saturated market, then it might not be worthwhile to do a backorder.
Keep Your Customers in the Loop
The key to a successful backorder is continually keeping your customers informed at every touchpoint. There’s nothing more frustrating than spending time shopping and finding out the items are on backorder upon checkout. Be upfront.
Customers are also naturally worried because you’re getting their money without a product on hand yet. You need to ease that anxiety for them by letting them know transparently when the items will be restocked. This not only gets them excited but also discourages them from going to a competitor. And whatever you do, keep your promise. Trust is hard to regain once broken.
Set Up an Email Waitlist
One good practice with backorders is to set up an email list specifically for customers waiting for that item. Not only will it be easier to communicate with them, but you can also offer them the option to opt into any of your lists for other products.
Regularly sending emails also creates anticipation and a sense of urgency. Again, this is effective communication in action.
Create a Separate Page for All Your Backorders
This is a smart strategy that keeps both you and your customers happy. On your website, you can create a new page which lists all of your products on backorder.
The obvious benefit is that you can still sell without any stock on hand, which is always good. However, it’s also a way to communicate from the start that these products will be delayed. This helps manage their expectations and reduces any frustration later in the buying process.
How to Avoid Backorder Situations
While positive in some cases, it’s generally best to avoid backorders as much as you can. It’s never a good long term strategy to burden your customers with unnecessary delays in the name of selling something with no stock.
Here are some ways to avoid backorders:
Invest in Real-Time Data
Getting an accurate view of your inventory stock levels is the key to reducing backorders, and you need it to be as close to real-time as possible. This is especially crucial if you receive hundreds of transactions in a day.
On top of stock levels, you also need to know your stock velocity. This is simply how fast your items are flying off your warehouse shelves. That information is crucial for forecasting when you need to replenish stock, and by how much.
Rely on Your Inventory Control System’s Automated Features
Modern inventory control systems will have robust forecasting and auto-ordering features in place to help anticipate low stock levels. Once you have enough stock data, the system can often give you an accurate prediction.
You can then set the system to trigger specific actions once those forecasts are met. For instance, your software can automatically place a reorder when stock dips down to critical levels.
Have a Contingency Plan in Place
Your supply chain is a delicate machine that is at the mercy of circumstances often beyond your control. If you’re not prepared for these situations, then it might be hard to recover. Always have backup processes in place.
Upgrade Your Inventory With Revel Systems
Backorders are ultimately something that should be actively avoided in your business. One of the most important steps towards achieving this goal is having a robust inventory management system, such as the one in our enterprise POS platform. Sign up for a free demo today and see how we can help improve your store’s reliability.