Backorder management is a critical aspect of supply chain operations, impacting various stakeholders involved in the process. Backorders occur when customer orders cannot be immediately fulfilled due to insufficient inventory. It refers to the situation when there is more demand than the available inventory, causing a delay in delivery or fulfilment of orders. The seller accepts the order with the promise to fulfill it once the item becomes available. It is essentially a temporary measure that maintains the sale while the product is being restocked.
In this guide, we’ll delve into the definition of backorders, their implications on supply chains, reasons behind their occurrence, pros and cons, and effective strategies for managing them.
Backorders vs Out-of-stock: Key differences
| Basis | Backorders | Out-of-stock |
|---|---|---|
| Meaning | Customer orders cannot be immediately fulfilled due to insufficient inventory. | No inventory is available at the moment, making it impossible to fulfill customer orders. |
| Restock Probability | Product is temporarily unavailable but will be restocked and fulfilled later. | Product is completely unavailable and may not be restocked for a longer frame of time. |
| Consumer Expectations | Customers are aware of the delay and typically provided with an estimated delivery date. | Customers are often unaware of when the product will be available again. |
| Impact on Consumers | Depending on the product, can be seen as a temporary inconvenience or create anticipation for the product. | Often leads to customer frustration & dissatisfaction. |
Reasons for Backorders
- Supply chain disruptions: Supply chain depends on various factors. Any disruption within one factor leads to a ripple-effect disrupting the entire chain. Items may become unpredictably unavailable due to supply chain complications, including factory shutdowns or raw material shortages. Occasionally, the flow of products can be disrupted by global events or regional issues, resulting in backorders. According to Founder Jar, Supply chain disruptions result in substantial losses in terms of reputation (54%), logistics (54%), and finances (62%).
- Unexpected high demand: Demand may surge unexpectedly during the holiday season, seasonal periods, or a successful marketing campaign. Businesses that rely solely on historical sales data for forecasting might miss these sudden shifts, resulting in insufficient backorder management. If businesses fail to anticipate sudden spikes in demand, then the chances for backorders increase.
- Manufacturing delays: Backorder also occurs due to production delays. Owing to equipment malfunctions, labor shortages, or factory disruptions, the manufacturing process gets hindered which further contributes to backorders.
- Inappropriate Management: Poor inventory management practices, such as inadequate forecasting or insufficient safety stock levels, can exacerbate backorder situations. Approximately 46% of small-to-medium businesses don’t track inventory or use a manual method instead, says Founder Jar.
Pros & Cons of Backorders
Pros
- Reduced Inventory Costs: Backorders allow businesses to maintain lower levels of inventory. By only stocking what is needed to fulfill immediate demand and relying on backorders for excess demand, businesses can optimize their inventory management and improve cost efficiency.
- Gauging Demand: Backorders provide valuable insights into actual customer demand, allowing businesses to adjust production or ordering strategies. Businesses can identify trends and anticipate future demand to optimize inventory levels and meet customer needs more effectively.
- Popular Marketing Strategy: Backorders can create a sense of buzz and exclusivity for popular products. Organizations can offer pre-order options or limited-time promotions for backordered items to drive demand and increase sales.
Cons
- Customer Dissatisfaction: Backorders create a chain of adverse effects for a business. Customers anticipate that their orders will be delivered promptly, and backorders can lead to dissatisfaction and disappointment, which can further erode the brand’s reputation and customer relationships.
- Inventory Management Challenges: Managing backorders effectively requires meticulous inventory tracking and communication. However, inventory management in itself is a great challenge. Unforeseen circumstances, coordination, real-time data, etc are crucial aspects of managing inventory. Hence, it is imperative to navigate the challenges for inventory management for effective backorder management.
- Increased Complexity: Backorders adds complexity to the supply chain solutions process, requiring additional resources to track orders, manage deadlines, and handle customer inquiries. Organizations have to allocate sufficient time and resources to manage backorders effectively.
Effective Strategies for Backorder Management
With effective planning and meticulous execution, backorders can be minimized successfully. Listed below are the best practices which will turn the impact of backorders favourably on your business:
1. Robust Inventory Management System
An advanced inventory management software offers real-time tracking of inventory levels, integrates with sales channels, and provides alerts for low stock levels and impending backorders. Investing in a reliable system allows for easy forecasting and analysis of demand patterns which helps to plan for backorders.
2. Set Reorder Benchmarks
Establish clear benchmarks for restocking to ensure optimal inventory levels and minimize the risk of backorders. Utilize reorder points for each product by analyzing historical sales data, taking into account seasonal trends, sales velocity, and lead times. As a critical precaution, it is imperative to periodically evaluate and modify these benchmarks.
3. Safety Stock Levels
Safety stock levels refer to the extra inventory a business keeps on hand in the times of emergency or mitigate stockouts caused by unexpected events in the supply chain. Establish suitable safeguard stock levels for each product that are sufficient to mitigate unexpected fluctuations in demand or supply chain disruptions.
Schedule assessments of reorder points and safety stock levels quarterly. During frequent supply chain disruption, conduct more of these assessments to ensure adequate protection against unexpected events and demand fluctuations.
4. Diversify Suppliers
Depending on a single supplier for your operations is dangerous for your business. Identify and engage with multiple reliable suppliers for key products to reduce dependence on a single source. Maintain open communication with suppliers to stay informed about potential disruptions and explore alternative sourcing options if necessary.
5. Proactive Customer Communication
One of the most important strategy while dealing with backorders is to maintain proactive communication with customers. Delayed orders can lead to customer frustration and potentially, cancelled purchases. However, well-timed and informative communication can significantly reduce this risk.
Customers must be informed about the status of their orders and any potential delays. Send automated order confirmation emails with estimated delivery dates and provide regular updates throughout the fulfillment process. Keep igniting customer interest by reminding them of the key features and benefits they’ll enjoy once they receive the product. Offer alternative solutions such as partial shipments or expedited shipping options to mitigate dissatisfaction.
Organizations should opt for an active approach & implement these strategies to effectively manage backorders, minimize disruptions, and maintain customer satisfaction throughout the supply chain.
Conclusion
Backorders are a double-edged sword in the supply chain. While they offer benefits like reduced inventory costs and valuable demand insights, they can also lead to customer dissatisfaction and increased complexity.
Successful backorder management requires organizations to strike a balance between the immediate needs of fulfilling customer orders and the long-term goals of optimizing inventory and supply chain processes. Through meticulous planning, continuous improvement, and leveraging technology, businesses can minimize the disruptions caused by backorders and maintain a competitive edge in the market.
