What are backorders

Backorder, pre-order, out of stock. How to make sure you aren’t missing out on revenue from stock outs.

What are backorders?

An item with a backorder status means it is currently not available to be shipped immediately but will be dispatched once stock has been replenished.

For the customer, this means that they will have a longer delay between ordering and receiving their goods, and for the business means they are able to take payment sooner to improve cashflow but may also result in a large backlog of shipments to manage once the inventory is received.

Backorders vs pre-order vs out of stock

Although similar the main difference between pre-orders and back orders is the cause of the delay in shipping.

Backorder applies when an item that has already been released is available to buy but is temporarily out of stock for immediate dispatch. For a backorder, clear communication of the estimated delay/delivery date is crucial.

Pre-orders are for items that are not yet released and are common for limited edition or high demand items, associated with scarcity. The purpose of a pre-order option is to allow customers to pay upfront and reserve a purchase. The stock is not necessarily unavailable to the seller, but a decision has been made by the business not to ship the item until a confirmed release date. Pre-orders also give a good indication of the demand for a product post-release.

In contrast to backorders and pre-orders, an out of stock status means that the item has been released and is not currently available for immediate dispatch or purchasing. In many cases sellers will hide these items from product catalogues until they are back in stock, however, this status can also indicate that the item is not expected back in stock and may be discontinued.

causes backorders?

Transport delays

Whether it’s the red sea shipping crisis, shipping container prices, extreme weather or strikes, a lot can happen between the manufacturer and warehouse. Any delays can impact stock availability in the short-term.

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Manufacturing problem

Manufacturing stock in countries like China can be a popular option when looking to keep costs low, but its easy to forget that these countries also have their own national celebrations and bank holidays. Chinese New Year for example, can mean suppliers close for over a week and is easily forgotten if you operate from the UK or Europe where this is not celebrated.

In addition, your manufacturer could also experience supply chain issues, difficulties accessing raw materials or machinery malfunctions that could lead to delays.

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Human error

Did you miss-read or misunderstand the communication from your supplier? Perhaps the bullet point was missing and you received 10.00 rather than 1000. Where your estimates based more on gut instinct than data? Or maybe you just completely forgot to place the order until much later. Errors are a frustrating issue that can have a huge impact on your inventory.

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Unusual demand

When demand for your products suddenly increases for reasons you weren’t able to predict, backorders are more likely to occur. Whether it’s a celebrity organically endorsing your business, being shortlisted for an award, being featured on TV or even a similar item becoming part of popular culture due to an unrelated TV series or Movie. You don’t need to search far to find examples – Chess boards after Netflix released The Queens Gambit, Pink clothing following Barbie movies or even Megan Markle’s favourite handbag.

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Any unusual damages or quality assurance issues that occur after stock arrived with you can also result in fewer products being available than planned. Combined with long lead times, this can also cause backorders as the stock on hand is not in a saleable condition. Damages can be caused by a number of things from temperature control problems, building maintenance and human error.

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Inventory discrepancies

With multiple sales channels and so much movement of stock in a warehouse it can be easy to lose track of inventory and sell stock that has already been purchased on another platform or was reserved for a B2B orders if you don’t have a method of synchronising and centralising stock.

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Should I allow backorders?

Ideally, your inventory management and forecasting is incredibly accurate and you can match the supply of products to the demand, without having overstock or missing out on potential revenue where you are unable to meet the demand, however this is nearly impossible to accomplish and so backorders can provide some much needed flexibility and free up some capital.

The side-effect of this however is longer wait periods for your customers that can impact satisfaction and the customer experience. If you don’t ensure customers are aware of delay at the checkout and kept informed, they can become frustrated and result in high customer service queries.

Some customers may also be put off by the delay and not order as it can be inconvenient and also impact trust in your services.

You should also only allow back orders for items that are definitely coming back into stock and that you have communicated an estimated dispatch date to the buyer.

How to
reduce backorders:

Automate re-ordering

There are a number of tools you can use to alert you to stock getting low. One of these is Inventory Planner by Sage. This tool will enable you to; get automated purchasing recommendations for each SKU, save time creating purchase orders and sync forecasts with marketing campaigns and promotions for increased accuracy, plus a whole host of other features to help optimise for cashflow, shipping and storage.

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Allocate safety stock

Safety stock is a portion of inventory held back as a buffer against any uncertainties and disruption. You can calculate how much safety stock you need in a few different ways to take into consideration your average daily orders and lead time.

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Have multiple suppliers

Having a local supplier, one with shorter lead times or lower MOQs can help you to compensate for the causes of backorders. In some cases it may be possible for your supplier to ship product to you by air instead of sea for a higher transport fee to get a portion of your order faster and bridge the gap and reduce the amount of orders you miss out on.

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Regularly review inventory forecasts and stock levels

Having good QA procedures in place within the warehouse can help you to run a tight ship when it comes to the movement of stock and ensure discrepancies are kept to a minimum. Hopefully your business will be growing month on month so it is also necessary to regularly review forecasts to ensure they are accurate with how your orders have been performing and that they don’t need to be adjusted.

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How to manage backorders?

Your sales channel will have the ability to facilitate backorders, whether this is by adding a notice to the listing and adding the expected inventory quantity to the site or though a dedicated tool.

These orders can then be filtered out of the daily pick and pack process and dispatched in one go once the stock has been received into the warehouse.

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