To understand what does backorder mean, let’s imagine that you’re a business owner and that your business is doing really well. So well, that you’re actually struggling to keep up with demand. How do you go about managing this crisis? You can’t shut shop, stop selling and run the risk of losing valuable customers. This is exactly where knowing about backordered items can come in handy.
Backorders are extremely common in retail nowadays. They give an option for your customers to place orders for a product even when it’s not available. Your customers are paying cash upfront with the promise that the product will be delivered in their footsteps sometime soon. This gives you the all-important capital to invest back in your business to improve operations. With that in mind, this article will give you an idea of the practice of backordering, instances where it may happen, how to manage backorders, and useful steps to avoid such situations.
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What does backorder mean?
Backorder means an order for a good or a product, or service that cannot be fulfilled due to a break in the supply chain. So, when a customer places an order for such an item, they’re informed that it is on backorder. They can continue with the transaction with the promise of it getting delivered sometime in the future. The delivery date will be determined based on how long it takes the supplier to replenish the products.
Backordered items meaning and how it’s different from out of stock
When an item is backordered, there’s an underlying implication that the product will be delivered sometime in the foreseeable future. A customer might get the message that “this item will not ship for 2 weeks from now.” There’s still some hope left.
But in the scenario of a product going out of stock, it means that the good isn’t available and does not have a definite date for resupply. So, you might get a message, “This item is currently unavailable.” Here, there’s no suggestion of the product being available again.
What causes backorders?
Backorders can occur for several reasons, some of which can be anticipated while others are simply out of your control.
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Unusual demand
Backorders are likely to occur when the supply chain cannot keep up with rising demands. These spikes in consumer interest can be attributed to seasonality like a Black Friday sale or the Christmas weekend, appearance on a television show like Shark Tank or having a renowned celebrity endorsing your product, or sometimes even a new sales channel that improves visibility.
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Low safety stock
Safety stock is the surplus goods you keep on hand in case of an unexpected failure in the supply chain or an unprecedented emergency. You may experience insufficient stock levels due to the fact that you were ill-prepared or kept a wrong count.
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Manufacturer or supplier problems
This could include a variety of scenarios. Like for instance, maybe your production unit got hit by a tropical cyclone and is now slowly starting to recuperate. Maybe, the overseas company you entrusted to create your products is on shut down for an extended holiday, like the Chinese New Year. Maybe, they’re having issues in hitting the production goals in time. All these situations can lead to a break in the supply chain and hence, more backorders.
What does backordered items mean, and why should your business know the answer?
What does backorder mean? As a seller, it’s important for you to know this because how you handle backorders can be integral to perceived customer service. Improper communication can lead to frustration and may prompt them to leave behind a poor review. Your reputation can take a bad hit, and they may switch to your competition for fulfilling all their future needs. Remember, it’s always cheaper to sell to a repeat customer rather than a new customer.
What can you do to manage backorders more effectively?
- Set expectations
Start by clearly mentioning on your website which items are backordered. Try to add the expected shipping time if you’re aware of it. Consider it a really bad start if your buyer isn’t aware of the delay when they’re placing the order.
Follow up with an email to let them know you’re working on rectifying the situation. Always keep in the loop about expected dates of delivery. Most of your customers will be happy as long as they know what’s happening.
- Build excitement
Setting up an emailing list can help you turn a crisis into an opportunity. Keep an account of the users (through their email addresses) who want to be notified when the product is back in stock. Meanwhile, tease out the functionality of your product and introduce related accessories that might interest them.
Counting down the days until the product ships is also a smart idea to engage customers. Doing that efficiently means you have successfully built a sense of anticipation and urgency among buyers for when the product becomes available again.
- Stay in touch throughout the process
Keep updating the customer on the progress of the order. Being straight with your buyers will help build trust. Send stock notifications so that they can follow the progress of all the backordered products. Social media or the product page on your site may be some of the options where you can give updates.
Crowdfunding that’s seen a surge in popularity provides an excellent model for this. Crowdfunded products are known to often experience production delays. The same applies to entrepreneurs who’re just starting out and are facing difficulties with the supply chain.
Pros and cons of accepting backorders
As we’ve discussed earlier, crowdfunding, as a business model, is centered around accepting backorders. A consumer is asked to pay upfront with the understanding that they will receive the product/reward months or sometimes years later.
Benefits of selling back back-ordered items
The crowdfunding model highlights some of the advantages of getting pre-orders for products. They are:
- Guaranteed demand– predicting future demands becomes a whole lot easier.
- Customer contacts– You obtain the contact details of a buyer as soon as they place an order. This helps you to reach out to them regarding future offers and discount sales.
- Prepayment– Since consumers are paying money upfront, you can use that capital to scale your business or invest in developing a new product.
- Growth potential– If some of your products are already doing well, you can leverage that reputation for capital to increase your manufacturing run. Hitting revenue benchmarks and growing organically isn’t simply dreams anymore.
- Market insights– Backorders are the best form of customer surveys since they’re conveying information about what product is being sought after the most. You now have valuable insight into what design is working and what isn’t.
Cons of backorders
There are some major downsides to backorders. Some of them are:
- Cancellations– The longer a consumer waits on their product, the higher the chances of them rethinking their order. They may start to look for other options. Or worse, their circumstances could change, meaning they no longer need the product.
- Payment processing– If you’re extremely unlike, which unfortunately happens a lot in business, their credit card might expire by the time the order is shipped. You run into the risk of them flaking out if you decide on asking them for information regarding an alternate mode of payment.
- Customer service troubles– Backorders create a series of issues that require the help of customer service to resolve.
Steps to minimize backorders
Backorders certainly aren’t ideal, but sometimes they can be unavoidable. But, there are some measures you can take to reduce the chances of them occurring.
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Set safety stock
As we discussed earlier, safety stock is the excess product that you keep on hand as a contingency plan. To avoid running out and disappointing customers, try to set a safety stock point that is high enough to cover excess demands. You can simplify the process by investing in inventory management systems that can forecast demands and track inventory in real-time.
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Calculate and set re-order points
A re-order point is the minimum quantity of any SKU that you need to have on hand before reordering more products from a supplier. You can calculate the reorder point by adding your lead time demand to safety stock in days.
Keep in mind to account for any upcoming flash sales, media appearances, or promotions while calculating. If all that sounds a bit too complicated, consider e-commerce fulfillment providers with built-in tech to rejig the reorder points in accordance with the forecasted demands.
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View inventory levels of fast-selling items regularly
Popular items may sell out quickly as compared to other products. So, make sure that you keep an eye on their stock levels. This way, you can make an informed choice about purchasing orders.
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Have multiple suppliers
Working with multiple suppliers gives you a safety net to fall back on if your primary manufacturer can’t get you the goods in time.
To avoid issues with backordering, you could also try dropshipping as an alternate inventory method. In this model, your supplier is responsible for shipping directly to the customer. They shoulder this responsibility, and any issues with orders fall onto them.
Conclusion
We hope you learned the answer to what does backorder mean. Understanding backorders is an integral part of inventory management. It can also go a long way in building long-lasting relationships with your customers and maintaining customer loyalty. So, follow the steps we’ve mentioned in the article to ensure that you’re well prepared in case of an emergency involving a break in the supply chain.