Dealing with Backorders: Solutions for Ecommerce Businesses

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Instant gratification is common desire for many people. Customers want to receive their products as soon as they order, or at least in the shortest possible time. 

But sometimes, problems such as a breakdown in the supply chain can make you run out of stock for a product. Unforeseen circumstances, such as a natural disaster or production shortages from manufacturers, can cause further delays.

In cases like this, your customers can still shop for these products if you offer backorders. It is a solution that allows customers to order out-of-stock items. While this method is not always ideal because it can cause frustration among customers, sometimes, businesses have no choice but to accept backorders.

What is the best step to take when backorders happen? Keep reading this article to find out.

Understanding Backorders: Definition and Implications

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What does “backorder” mean? The term refers to buying an item that is unavailable at the current time of order. Such a product is, however, expected to be back in stock soon and is still visible to users. It is a common phenomenon in the application of inventory management techniques.

A backorder item is usually in the plans of a manufacturer but is yet to be produced. Immediately after it restocks, it goes into the delivery list.

Online shoppers can make a backorder purchase at an e-commerce store. These items will then be delivered as soon as they’re available again. In other words, this is simply making a preorder for an item that is temporarily not available.

There is also a concept known as a partial backorder. It refers to a backorder situation where only part of the order is not in stock. In that case, the available items are shipped immediately, while the backordered item is delivered once it restocks.

While accepting backorders can offer a solution when unforeseen circumstances occur, it is not good for business. It can affect your customer base negatively. 

Ecommerce businesses with lower backorders are likely to get more customers due to quicker delivery. An ecommerce platform with frequent cases of backorders that cannot fulfill customer demand risks losing its clients.

Another implication for businesses that cannot meet the demand and promise to deliver at a later date is backorder costs. It refers to costs that a business has to shoulder to fulfill sales orders at a later date.

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Causes of Backorders: Identifying Challenges

Backorders occur due to various reasons. It is important to identify the causes of backorders, as tackling them is the first step to take if you wish to prevent or minimize their occurrence. A few reasons why backorders happen include:

• Wrong forecasting: Inaccuracies in product demand forecasts can result in low safety stock. This can increase the likelihood of backorders.
• Unexpected demand: During peak periods like holiday seasons, demand may suddenly skyrocket, exceeding what is usually observed. Unusual demand can lead to backorders. 
• Delayed orders: When a supplier fails to meet the restock needs of client companies, the seller in turn may be unsuccessful at completing the sales orders of their customers.

• Human error: An employee can mistakenly record an order as a backorder even when the item is available.
• Manufacturing issue: When suppliers face issues such as a lack of raw materials or factory shutdowns, it may become hard to meet demand.

While certain cases of backorders cannot be avoided, you can reduce the rate when you know the causative agents. Managing backorders becomes easier after identifying pain points.

Inventory Management Strategies: Prevention and Planning

Inventory management is necessary for maintaining a balance when taking stocks. It prevents both running out of supplies and overstocking. It also ensures normal inventory. Normal inventory refers to the amount of items required for a business to meet sales and operational needs. Some inventory management strategies include: 

• Just-in-time inventory: This type of inventory stock is replenished only as needed for sales or production. Any stock that is ordered is for immediate use. It spends very minimal time in storage.
• Inventory optimization tools: There are inventory management software tools that can help you with important functions such as automated reordering and demand forecasting. They allow you to keep up when there is less inventory to ensure the continuous running of your operations.
• Stock-keeping maintenance: Monitor all stock-keeping units (SKU) to identify items that are either not selling at a reasonable rate or simply not selling at all. 
• Supplier management: The performance of your supplier is important. A supplier who fails to meet up to demands frequently may be bad for your business.

These tips can help you prevent and plan ahead to minimize or completely avoid backorders.

Effective Customer Communication: Transparency and Updates

Proper communication is an effective tool to manage backorders. Ensure that communication lines are always open to your customers so they can reach you at all times. Be transparent in proceedings and keep customers informed of what is going on at every stage of their order.

If an item might take longer than envisaged, let clients know why this is happening. It can foster good relationships with your customers and may reduce any discomfort they may feel from the delay. Effective communication is a good way to achieve a completed sale.

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Prioritizing Backorders: Order Fulfillment Sequence

Backorder fulfillment should be on a first-come, first-served basis. When clearing your company’s backlog, older customer orders should receive priority over more recent ones. 

It is only fair to process things this way as it shows equity. Customers who have been on the waiting list for the longest period will feel a sense of belonging when you attend to them first.

Alternative Product Offerings: Providing Substitutes

One way to curb backorders is by offering products that could serve as a substitute for out of stock items. You can do this by showcasing products that can perform similar functions or have similar qualities as the original product the customer intended to purchase. 

This means if one product is missing, another can take its place. Hence, there will be no need to order the out of stock item. 

Offering alternative products can reduce the incidence of backorders. A good example of offering an alternative product is suggesting clothes in the same style from a different brand or a TV of the same size by another manufacturer to customers buying clothes or TV sets, respectively. 

Streamlining Supplier Relationships: Collaboration and Replenishment

A great relationship with your supplier can reduce cases of backorders. Collaborate with them on demand forecasting and inventory planning. This will ensure that your goals align and will minimize the risks of overstocking or shortages. You will ascertain reorder points with ease.

Another thing to work out with your supplier is the ordering system. An automated ordering system can help to eliminate manual errors. Ensure the purchase order is clear and contains all necessary elements. The payment process should also be simplified as much as possible. This can improve your relationship with your supplier.

It is very important to constantly communicate with your supplier as it can help you to gain market insights and figure out minor problems and tackle them on time. This will solve all supply chain issues, resulting in a steady flow of inventory.

Managing Customer Expectations: Realistic Delivery Timelines

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It is not a good look to raise customers’ expectations and then fail to deliver. This can cause disappointments and impact negatively on your business. When it comes to the length of delivery time, be honest with your customers and set a reasonable timeframe for backordered products.

Know your limits, anticipate potential obstacles, and choose flexible deadlines to avoid disappointing your customers. Disappointed customers may stop doing business with you, especially if your store lets them down frequently.

Remember, making a more modest promise and keeping it is always better than promising ultra-fast delivery and failing to meet that deadline. Consistency is important for building trust, which in turn will win you loyal customers.

Automating Inventory Tracking: Implementing Systems

Automating inventory tracking can make you more efficient in managing stock. You can confidently track the availability of all items directly in the program. Steps to take to achieve this include:

• Evaluating current practices: Assess your current inventory process. It will help you spot any problems that you need to work on. 
• Making the right choice for your inventory management system (IMS): Since there are different types of IMS, it is important to pick one that will maximize the gains for your business. Key factors to consider when making a choice include real-time tracking, reporting and analytics, and barcode scanning.
• Integration with existing systems: This is very important for automation. You must be able to synchronize your new inventory management system with existing warehouse management systems, ecommerce platforms, and accounting software.

You will be able to manage inventory flows better when you automate tracking. Other benefits of automating inventory tracking include minimal errors, better time management, and better operational efficiency.

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Backorder Handling Policies: Refunds and Cancellations

It is wise to implement policies that are beneficial to your customers. For example, they should be able to cancel their backorders if their plan changes. Also, allow them to request a refund if they determine that they won’t be able to wait anymore for the backordered goods. Every customer places value on a flexible refund and cancellation policy.

Continuous Improvement: Analyzing Backorder Data

Backorder data analysis plays a key role in improving inventory management. The first step in analyzing your backorder data is to collect and then consolidate it. The information that you need includes product ID, backorder date, quantity ordered, and expected delivery date.

After obtaining this important information, classify the backorders. The next step is to calculate the key metrics. These include the backorder rate, average backorder duration, and fill rate. 

Assess the performance of your supplier and your current inventory policies. After you spot areas for improvement, implement corrective measures to set things right.

Monitoring and Forecasting Demand: Improving Accuracy

Accurate forecasts on stock availability can help you get your stock management right. You can determine needed stock or detect excess stock in your possession by calculating your backorder rates. 

Using solid inventory management software can help to streamline your operations and reduce cases of backorders. It can also ensure the availability of raw materials. This, in turn, will ensure that backordered items are handled promptly. 

You will solve the major problem of out-of-stock items as you will always be able to detect any warehouse management discrepancies.

This is the formula for calculating the backorder rate:

(Number of Delayed Orders Due to Backorders / Total Number of Orders Placed) × 100 = Backorder Rate

Supply Chain Optimization: Efficiency and Risk Reduction

Supply chain optimization refers to any task that is done to improve the quality of supply chains. The goal is to make the system more efficient while reducing or eliminating risks.

Some strategies to achieve this include:

• Increased visibility: There are automated systems you can use for real-time tracking of inventory and stock levels. You can also streamline data flow to improve your decision by using integrated systems.
• Supply planning: Be flexible with orders you take from your supplier. You can adjust your requests based on the rate of demand. Ensure that your supplier has the capacity to match the forecasted demand. This will prevent any issues that could lead to backorders.

These strategies will help you build a more efficient system and reduce risks. They will also reduce the chances of backorders happening. 

Proactive Communication with Suppliers: Ensuring Timely Delivery

Clear communication with your supplier can help you achieve timely delivery and improve the overall supply chain. We will consider some best practices to achieve this below:

• Establish Clear Communication Channels: Ensure that you have the contact details of the supplier and appropriate internal department and that they have yours as well. Regular meetings are important. They allow everyone to monitor proceedings as they occur. Also, plans can be hatched in such meetings. 

Avoid using only one channel for communication. It is best when you use multiple channels such as calls, emails, and social media platforms. This will allow you to reach the supplier at all times and vice versa.

• Establish key performance indicators (KPIs): Communicate clear KPIs such as delivery rate and accuracy with your supplier. Review performance from time to time and point out areas that may need to improve so that your working relationship can continue without misunderstandings.

Having a strong, lasting relationship with your supplier is possible if you follow these practices.

Post-Backorder Analysis: Learning for Future Preparedness

Post-backorder analysis can help you to understand the causative factors for backorders. You can then take the lessons learned and use them to prepare for the future.

• Data collection and analysis: Gather all relevant historical data that relates to the backorder. These details include lead times, accounting records, the entire order details, and supplier performance. After collecting data, analyze it to determine backorder patterns. These patterns will help you identify the root causes of the situation.
• Demand improved forecasting: Compare actual demand and forecasted demand. This will help you find any discrepancies. You can then act on this to improve forecasting. Another way to improve forecasting is to utilize advanced analytics and machine learning. It can improve the accuracy of forecasts.

Post-backorder analysis can help prepare you for future demand and minimize incidences of backorders in your online store. Thus, you will be able to attend to every customer’s order with ease.