Backorder Explained: Causes, Examples, Tips, and Pros and Cons

Have you ever been excited to purchase a popular item online, only to find it's out of stock, with a promise that it'll be available soon? This common frustration is due to backorders—a situation both familiar and challenging for consumers and retailers alike.

Backorders occur when demand outstrips the available supply of a product, but retailers still allow purchases to be made with the expectation that the product will be stocked and shipped at a later date.

While this can secure sales and maintain customer interest, it can also lead to potential dissatisfaction if not managed effectively.

This guide explores how businesses can manage backorders efficiently, ensuring that customer satisfaction and loyalty remain high even when their favorite products aren't immediately available.

Table of contents

• What is a Backorder?
• How Does a Backorder Work?
• What Causes Backorders?
• What are the Pros and Cons of Backorders?
• What’s the Difference Between a Backorder and an Out of Stock?
• What are the Best Practices for Handling Backorders
• What are the Best Tips to Minimize Backorders
• FAQs
• Conclusion

What is a Backorder?

When you want to buy something that’s not currently in stock, you might still be able to order it through what’s called a backorder.

This means the item is out of stock but expected to be replenished soon. Backorders happen for various reasons like unexpected high demand, delays in the supply chain, or during ongoing production processes.

How Does a Backorder Work?

When you order an item that's on backorder, the process is seamless and straightforward. As soon as your order is placed for an item that isn't currently in stock, the business logs it in their inventory system as a backorder.

This system is crucial as it monitors when the item will likely be back in stock. Businesses understand the importance of communication during this waiting period, so they typically provide you with an estimated delivery date and keep you updated on any changes.

This ongoing communication helps maintain your trust and ensures a positive shopping experience.

Once the item is available, it is promptly shipped out, prioritizing those who placed their orders earliest.

Example

Let’s say a new smartphone model has just been released and it quickly sells out due to high demand. The manufacturer might still allow orders for the phone, placing them on backorder. This means:

1. Order Placement: You can order the phone even though it’s sold out, and you’ll be given an estimate of when it might ship.
2. Inventory Management: Behind the scenes, the order prompts the retailer to check stock levels and liaise with the manufacturer to get more phones made.
3. Customer Communication: While you wait, the retailer will keep you updated on the status of your order, especially if there are any changes to the expected delivery date.
4. Fulfillment: Once the phone is back in stock, it’s shipped out to customers who ordered it, starting with those who placed their orders first.

This approach allows the seller to continue making sales and satisfies customers by securing their purchase, even if they have to wait.

What Causes Backorders?

Here's a straightforward look at the top reasons why backorders might happen:

High Demand Outstrips Supply

Sometimes, a product becomes more popular than expected, leading to rapid sell-outs.

This can be due to effective marketing, seasonal buying rushes like during the holidays, or because a product suddenly trends on social media. When demand overshoots the available stock, retailers find themselves having to backorder items until new stock arrives.

Supply Chain Issues

Backorders are often the result of disruptions in the supply chain.

These disruptions can be anything from delays at the manufacturing stage, transportation issues, or unexpected closures at supply factories. For instance, if a shipment of essential parts gets delayed, the final products can't be made and shipped on time, forcing retailers to put customers on a waiting list.

Mistakes in Inventory Forecasting

When businesses don't accurately predict how much stock they'll need, backorders can occur.

This might happen if a retailer underestimates how popular an item will be or doesn't keep enough safety stock as a buffer. Poor forecasting can leave shelves empty and customers waiting until more products are made or delivered.

What are the Pros and Cons of Backorders?

Backorders can be both beneficial and challenging for businesses. Here’s a simplified breakdown of their advantages and disadvantages:

Pros

Continued Sales

Backorders allow businesses to keep selling even when items are out of stock, helping avoid lost sales.

Keeps Customers

They give customers the option to wait for products rather than looking elsewhere, which can help build loyalty.

Valuable Data

Backorders help businesses understand which products are most popular, aiding in better inventory and production planning.

Efficient Inventory Management

They enable businesses to maintain leaner inventory, reducing costs associated with excess stock.

Cons

Risk of Frustration

Long waits for backordered items can upset customers, potentially damaging the business's reputation.

Complex Management

Backorders require robust systems and good communication to manage effectively, adding complexity to operations.

Unpredictable Wait Times

The restocking times for backordered items can be uncertain, which may lead to extended waiting periods for customers.

Understanding these points can help businesses better manage backorders, balancing operational efficiency with customer satisfaction.

What’s the Difference Between a Backorder and an Out of Stock?

Now that we've explained what a backorder is, you might be wondering how it differs from an item being out of stock.

If it's still unclear, here's a good overview of the difference between an 'out of stock' item and a 'backorder'.

The difference between "backorder" and "out of stock" is simple. If an item is on backorder, you can still buy it, and it'll be shipped when restocked. An "out of stock" item isn't available to buy until the store replenishes it, and there’s no guarantee when or if that will happen.

So, backordered items are just temporarily unavailable, while out of stock items may or may not return.

What are the Best Practices for Handling Backorders

If you're a business currently handling backorders for your customers, consider reading the points below to help optimize your current process:

Communicate Openly

Always be upfront about backorders. Clearly mark which items are backordered on your website and include expected shipping times.

Keep your customers in the loop with regular updates via email or SMS, explaining any changes to their expected delivery date. This transparency helps manage their expectations and reduces potential frustration.

Enhance Customer Support

Equip your customer service team with the latest information about backordered items.

Consider offering alternatives like partial shipments if some items are available sooner, or discounts on future purchases to apologize for the wait.

Responsive and accommodating customer service can turn a potentially negative experience into a positive one.

Set Realistic Expectations

It's better to under-promise and over-deliver. Provide conservative estimates for when backordered items will be available. If delays occur, communicate these promptly to keep trust intact.

Honest communication about timelines can prevent disappointments and keep your customers satisfied.

Implement Robust Inventory Management

Use advanced inventory management tools to keep track of stock levels and predict demand more accurately.

This helps prevent items from becoming backordered in the first place and ensures quick replenishment when stocks run low. Also, consider maintaining a safety stock for high-demand products to buffer against sudden spikes in orders.

Seek Feedback

Actively ask for feedback from customers about their backorder experience. This not only shows that you value their opinion but also provides insights that can help you improve your processes. Listening to your customers can lead to better service adjustments and stronger customer relationships.

Prioritize Efficient Fulfillment

When backordered items become available, prioritize their processing and shipment. Efficient handling at this stage can compensate for earlier delays and leave customers with a positive final impression of your service.

By following these practices, you can handle backorders in a way that minimizes inconvenience and maximizes customer satisfaction.

What are the Best Tips to Minimize Backorders

Now, if you want to avoid getting backorders in the first place, consider checking out the tips below. These will allow you to keep your customers happy and your inventory in check.

Implement Advanced Inventory Management

Use top-notch inventory management systems to keep a real-time eye on your stock levels. This enables you to make quick decisions to avoid stock shortages.

Regularly review sales data and market trends to predict customer demand more accurately and tweak your stock levels as needed.

Maintain Appropriate Safety Stock Levels

It's wise to keep enough safety stock for items that are in high demand. Safety stock acts as a cushion to handle sudden spikes in demand or disruptions in supply.

Set your safety stock based on factors like lead times, the variability of demand, and your target service levels, and revisit these figures periodically to ensure they're still relevant.

Optimize Reorder Points

Define clear reorder points based on your lead time demand and safety stock levels. Utilizing automated systems can be a game-changer here, as they alert you to replenish your inventory just in time to prevent a potential stockout.

Build Strong Relationships with Suppliers

Cultivate good relationships with a diverse group of suppliers. This strategy reduces your reliance on any single supplier and lessens the risk of supply chain hiccups.

Open and ongoing communication with your suppliers can also lead to quicker turnaround times and more reliable deliveries.

Harness Technology and Automation

Leverage modern technology to automate key aspects of backorder management, including order tracking, prioritization, and customer notifications.

Automation helps streamline your processes, cut down on human errors, and ensure that communications about order status are timely and accurate.

Proactive Customer Communication

Clearly communicate about possible backorders right from the start. Keep your customers updated on the status of their orders and be transparent about expected delays.

Providing options for order cancellation, exchange, or alternative choices if delays become extensive can significantly boost customer satisfaction.

Regularly Review and Adapt

Always keep an eye on your backorder trends and underlying causes. This ongoing analysis will help you refine your strategies for forecasting demand and managing inventory.

Stay flexible and ready to adjust your practices based on what the data tells you and the feedback you receive from customers.

By following these steps, you can dramatically reduce the frequency and impact of backorders, ensuring that your business remains responsive and customer-focused.

FAQs

What financial effects do backorders have on a business?

Backorders can tie up money that could be used elsewhere in your business because you're waiting to get paid until orders are shipped. They keep sales going because customers can still order items, even if they're not immediately available.

What can small businesses do to lessen the impact of backorders?

Small businesses should work closely with their suppliers to make sure they can get products reliably. They should also use tools to keep track of inventory in real time and set up alerts to reorder before running out. Being honest with customers about wait times and maybe offering something extra as a thank you can help keep them happy, even if they have to wait.

How can technology help businesses predict and handle backorders?

Businesses can use software that analyzes past sales, seasonal trends, and what's happening in the market to forecast demand better. This helps adjust how much stock to keep on hand and reduce backorders by predicting what customers will want in the future.

Conclusion

Managing backorders effectively is crucial for keeping your inventory balanced and your customers satisfied. Packiyo's warehouse management system offers powerful tools designed to help you handle these challenges with ease.

Packiyo ensures real-time tracking of your inventory across all sales channels, which is key to preventing backorders. It allows for swift actions to replenish stock and maintain optimal levels, minimizing the chances of running out. The system's automation capabilities streamline everything from order processing to shipping, making backorder resolution as efficient as possible.

With Packiyo, you also gain valuable insights from detailed reports, helping you understand backorder trends and refine your inventory strategies accordingly. Plus, the mobile app enhances your ability to manage operations on-the-go, increasing your responsiveness to urgent stock issues.

If you want to read more on similar topics, head over to our blog where we cover topics like 'what does discreet packaging mean,' 'improve warehouse efficiency,' and more.

In conclusion, managing backorders effectively keeps customers happy and helps maintain sales momentum during high-demand periods.

We hope we've helped you understand this topic better. If you have any questions, don't hesitate to comment below.