Backordering is the practice of letting customers buy (and pay for) items you're temporarily out of stock on.
Nothing can drive you crazy faster than having to turn away customers because you're out of the items they wanted to buy. This is happening a lot now that supply chain issues are causing unexpected delays and retailers are coming up out of stock. Good inventory management is great, and your business doesn't grow without it, but even the best forecasting goes wrong sometimes, so what do you do? Maybe you should consider backordering.
Taking customer orders that can't be filled just now but will be shipped in the near future helps you capture sales that would otherwise be lost. It can also be a deliberate strategy to keep your carrying charges as low as possible, though this advanced technique takes excellent inventory management software to pull off effectively.
Whether it's a response to a supply chain hiccup or part of your cost-containment strategy, learning how to handle backordering in inventory management can help you grow your business and succeed in a competitive ecommerce environment.
What Is Backordering?
Backordering is the practice of taking an order from your customers on the front end for items you may not have in stock on the back end. This can happen because of shortages and a supply chain problem, such as when half your inventory is sitting on a cargo ship waiting to dock at Long Beach. You might also be doing just-in-time inventory management, in which the item doesn't ship from the vendor until the order is processed.
In this process, the request for a backordered item goes directly to a vendor rather than to the fulfillment warehouse. If your normal flow is for all orders to go through your delivery center, you might have a delay getting items delivered and processed. In a just-in-time model, you're effectively turning the vendor into your fulfillment center, which is a neat trick if you can manage it.
Living With the Modern Fulfillment Process
Running out of stuff used to happen a lot, back in the days when most shopping was done at the dry goods store, and Old Mr. Parsons had to guesstimate how much feed and seed was going to move in the month it took to get a purchase order processed.
The 20th century brought much more complex supply chains and sophisticated inventory management tools. With automated inventory management software, containerized shipping, and smart database systems, inventory managers can drastically cut the time stock spends sitting expensively unsold on the warehouse shelves.
This has real consequences for the customer experience. Being able to buy a thing, anything, in the time it takes to type a credit card number is one of the nicest features of the modern world.
Of course, you know there's a huge logistical tail wagging behind that dog. If a single thing goes wrong, you're looking at frustrating delays on the delivery date, costly overstocking of items not in-demand, or even cancellations of sales you've already made.
Backordering in Inventory Management?
This is where backordering is a lifesaver. Tell the customer something they want is out of stock and roughly when it will be available. Apologize for the inconvenience, and give them a close estimate of when it will be delivered.
If it's going to be too long, offer them an alternative, such as a similar item they can get now or a discount on the sale to take the sting out of waiting.
As you may have noticed, there's a lot that goes into that process. To make a customer happy this way, you have to, at a minimum:
- Know that the item is not in stock.
- Have an idea when it will be available.
- Transmit that information to the inventory management database interfacing with your customer website.
- Offer preset order fulfillment options, from a short delay to processing a discount or finding and recommending a substitute item.
- Process the order and load the backordered items into your delivery workflow, ideally with an intelligent decision about whether to ship items piecemeal, as they come in, or all at once as a packaged order.
- Items 1 and 2 are basically contingent on knowing your own inventory and supply chain. Good inventory management software can help with that.
- Item 3 is a web design issue that can be as simple as a popup notice, but it has to be pegged to items that are actually on backorder, with the notice removed as soon as the stock is received.
- Item 4 is a web development/order processing issue, and it can be a headache if your front and back ends aren't properly integrated and talking to each other well.
- Item 5 is order fulfillment, and it's mostly going to happen at your warehouse with nothing more than high-level policy guidance from management.
What To Do When You Run Out of Stock?
So you have a customer who's decided to buy from you, and one or more of the things they want isn't in stock. You have a few options here, depending on what your lead time is likely to be and how reliably you can promise to have it delivered. Take this table as a suggestion, and feel free to adapt the strategies to fit better with your business:
|Anticipated Length of Delay||Should You Notify the Customer?||Optional Remedies|
|1-3 days||Optional, but probably not necessary||Adjust the anticipated shipping and handling period|
|4-7 days||Optional, but advisable||Let the customer know about the delay with an apology|
|1-2 weeks||Yes||Offer alternative items or discounted shipping|
|Over 2 weeks||Yes||Offer alternative options or discounts on future purchases|
Backordering as a Deliberate Strategy
Backordering is more than an emergency management technique for your ecommerce business. You can build your inventory control around taking preorders for items you don't technically have in stock yet. Making your online store into what's effectively a distributor for your vendors has huge advantages if you can do it right.
How To Do It Right?
Say you run a small business online, and there's a new product coming to market that you just know your customers will love. You're not 100% sure of that yet though, and you're not big enough to shrug off a major flop the way Apple can deal with low iPhone sales.
You don't know what customer demand will be, and disruptions to your limited cash flow could be a real problem for your bottom line.
What do you do?
- Start by building a regular product page—the same as you would if you had the out-of-stock items sitting in your storage space.
- Process payment for the inventory like normal then forward the order to the wholesaler supplying you in something like a real-time exchange.
- Instead of ordering the stock for your own fulfillment warehouse, which does nothing but increase wait times and carrying costs, use your order management program to pass along the customer's delivery address and have it sent directly there.
This is close to how Amazon did things when it first got started. Instead of maintaining costly facilities all over the world, the first really big ecommerce site just acted as a middleman for connecting a customer base with sellers of books and various odds and ends.
This liberated Amazon to skip the inventory tracking and turn the twin issues of excess inventory and low stock levels into somebody else's problem.
Keeping Backordered Customers Happy
If you're managing backorders right, the customer might never notice a backlog or delays in delivery time frames.
Still, it's good to have a communications strategy for when things don't go right. Keeping customers happy while you're doing complex backordering work with the stuff they bought is important if you would like return visits and customer referrals. Here are a few tricks for keeping everybody happy when you're not in control of the fulfillment yourself:
- Keep everybody informed: Set up a social media account; it doesn't matter where, though Twitter and Facebook are perennial favorites. Post notifications about delays and items with low inventory levels.
- Set up multiple reorder points: Make it easy for customers to place a sales order with you. Include product or category links with all your communications, and provide recent buyers with limited access to your public inventory management system to track their ordered products.
- Splurge on safety stock: Safety stock is the small number of in-demand items you're keeping on the shelf anyway, just in case. If you ever have an emergency, such as a surge in demand or a vendor that runs out of raw materials for the product you're selling, having a few extra to fill high-priority orders comes in handy.
Bringing It All Together
Smart business owners are always innovating. Whether you're covering for a temporary shortfall or experimenting with just-in-time delivery, backordering is a part of smart inventory management you can't do without.
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