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Backordering is a customer satisfaction measure and process that many retailers facilitate, allowing their customers to purchase an item even if it isn’t in stock. These customers have essentially reserved an item that will be considered “sold” as soon as it arrives in the warehouse for pickup or delivery. Backorders occur most often when a product is more popular or in-demand than the retailer expects or prepares for, and allows the retailer to continue selling this product even after they have none left in stock.
This isn’t the worst problem a retailer could have, but it does represent a problem in inventory management. Even if a rise in demand is unpredictable, properly calculating reorder points can help to avoid or mitigate this type of problem before it becomes one.
While backordering serve a purpose, it is not a preferable way to facilitate sales, as each backorder stresses and complicates every step of the supply chain. Additionally, just because a retailer facilitates backorders doesn’t mean a customer will want purchase an item that’s out of stock. Even the most loyal of customers might begin looking to your competitors if you can’t satisfy their immediate needs. How can retailers deal with backorders as efficiently as possible, and how can they prevent one in the first place?
How Does a Backorder Work?
Let’s say that Sandy sells seashells by the sea shore at the Sea Shack. She doesn’t actually find the shells herself; her sister Sarah collects and cleans the shells for Sandy to sell.
Everything is fine at the Sea Shack, as long as Sarah is able to find enough shells for Sandy to sell. Unfortunately, circumstances are about to change. One summer, a nearby beach closes, forcing sunbathers and surfers alike to move to Sandy and Sarah’s instead. The Sea Shack gets more business than they were prepared for, which seems great, until Sandy realizes how quickly sales are depleting her inventory.
Unfortunately, Sandy cannot just make shells herself. She has to wait for Sarah to find and clean them before she can sell them. In order to manage her customer’s expectations, Sandy tells customers that the shells are on backorder. They can buy a shell on backorder, effectively “reserving” one as soon as it comes in.
Managing Fulfillment of Items on Backorder
While simplistic as an overall idea, backordering is much more complicated in practice. If Sandy gets a customer that wants to buy an item on backorder, there’s a series of steps that she needs to follow to ensure that the purchase, and the resulting customer’s purchase order, are properly fulfilled.
Record the Customer’s Purchase Order
When a customer purchases a backordered item, retailers need to create a purchase order to facilitate product fulfillment. Time is always of the essence when a retailer runs out of product, but some situations are more urgent than others. Drop shipping can help to get backordered products out to customers faster, than direct orders that will need to be picked up. Whether processing the customer’s order through another supplier and shipping it from there, or holding the product in their own warehouse for customer pick-up,.
Update Reorder Point Calculations
Supply did not meet demand if you have to backorder your product, so it’s important that you update your reorder point to avoid situations like this in the future. This is the first crucial step in fixing your inventory problem. You can manually update your reorder point, but digital inventory management systems are more efficient at keeping track of that sort of thing.
Fixing Your Inventory Problem
Having items on backorder is a good problem to have, but a problem nonetheless. Unless a wildly popular product is on the verge of release, backordering should always be avoided. Perfecting inventory management measures will help.
Use Proper Inventory Management
Backorders signifies an organization’s lack of inventory awareness and management. Fortunately, these problems can be simply rectified, by updating the warehouse’s safety stock formula.
Safety stock signifies a warehouse’s emergency inventory. If a warehouse has to backorder items, that means that safety stock measures weren’t up to par, in this instance, and failed. In terms of safety stock calculations, this means that either daily usage rates and/or lead time amounts have increased drastically, or that they weren’t calculated correctly in the first place. Either the retailer didn’t account for how much product they’d sell (on average, on their busiest days, or both) or that the supplier is taking longer than normal to deliver inventory shipments. Both of these are important factors that need to be monitored and properly account for.
Use the Right Inventory Software
Like most things, properly accounting for inventory is easier said than done. However, this responsibility doesn’t have to fall completely on one person’s shoulders, nor should it rely solely on their senses. Asset tracking software can autonomously manage inventories,keep track of suppliers and shipments, help with warehouse space management, and even assist in maintaining security. Plus, software systems handle data much more adroitly than people do, significantly reducing inherent risk and human error, and can be a great way to avoid the headache that comes along with a backordering problem.
Find the Right Supplier
Making sure that you have the right supplier for your needs is one of the best ways to prevent backordering inventory. Retailers and suppliers have to reach a balance that supports both business’s needs — for the retailer, that means always maintaining acceptable levels of inventory in stock, which will be different for every location. Consider finding a wholesale distributor to help lower costs and manager your inventory better.
Backordering inventory is sometimes unavoidable — it’s not always possible to calculate how quickly a popular item will fly off shelves, and it’s up to suppliers and manufacturers to create enough of those items and get them to the retailer. On the other hand, if a warehouse finds themselves consistently placing backorders, especially for multiple items from various suppliers and manufacturers — something needs to change.