There are many terms you may come across in the eCommerce landscape when building your new business. Dropshipping, purchase order, safety stock, and carrying costs are all excellent examples. Although some words will be more crucial to you than others, it's best to have a basic understanding of the terminology you'll encounter on your journey.
Backorder is one of the more common terms that appears for an ecommerce business. A backorder is a request for a good or service not currently able to be filled, due to lacking stock levels. For physical products, you might get backorders for products that you're not holding in your warehouse, but that are still available from suppliers.
Let's take a closer look at the meaning of Backorder.
Backorder Definition: What is a Backorder?
A backorder is an indication that demand for a product outweighs the supply. This could be a good sign initially for your company, but it does mean that you'll need to order more stock to manage sales orders. You could also risk losing customers who aren't willing to wait for stock levels to replenish.
The nature of your backorder, and the number of items available on backorder will affect the time required before the customer eventually receives the product required. The higher the number of backordered items, the higher the demand.
Backordered products should still be generally available. Just because you don't have the products available to send to your customers, doesn't mean you won't have the raw materials, or supply options to fulfil those inventory requests. Keeping products on backorder can even assist in boosting demand, increasing customer base potential, and retaining future clients.
A company's backorders are often an important factor in inventory management analysis. The number of items on backorder, and the time taken to fulfil these orders often provides insights into how well a company can actually manage its inventory. A manageable number of orders and a short turnaround time means the company is doing well. However, larger backorders and long wait times are often problematic.
Extensive company backorders can often lead to anger and frustration among customers, particularly when demand remains high.
Is Backorder Different from Out of Stock?
Backorders refer to a kind of out-of-stock product, but it's important to note that the definition is slightly different. Backorders are expected to be restocked and delivered to customers by a specific date. Businesses will often sell products they have on backorder and guarantee to ship them to customers when inventory is replenished.
If an item is backordered, the shopper can buy it now but receive it at a future date. Customers often backorder an item when they want to make sure they get one, but don't mind waiting for a little while for the order to come through. An order being out of stock, on the other hand, will mean that it's not available for shipping now, but the company also isn't entirely sure when it will be ready to go through to customers. If an order is out of stock a customer usually won't be able to order it.
There's a chance that out-of-stock products will never come back into the store.
What Causes Backorders?
Backorders can happen regardless of how well organized your supply chain and inventory management system might be. There are various issues that can lead to backorders, including an increase in demand you haven’t predicted, and changes with the way items are shipped.
Some of the common reasons you might discover what backordered means for yourself include:
· Unexpected demand: You can usually determine how many credit card transactions your’e going to get for each product by looking at your statistics and analytics. However, there will be times when customer order levels go far beyond usual. High demand can be caused by a wide range of things. When your orders go up, you might not have enough inventory in place for your fulfillment services to support all clients. This means increasing orders, and asking some customers to wait for their products.
· Low levels of safety stock: Safety stock is a good way to make sure that your small business can avoid a stockout or backorder issue. With safety stock, you stock items that might increase in demand at random, just in case you don’t have the best delivery time from your supply chain at some point. If you don’t have enough safety items for your online store, this can lead to an increase in backorders.
· Supplier problems: Manufacturing and supplier problems make it hard to ensure you can time inventory to be available at the right time. You will need to think carefully about how you’re going to support your customers if your inventory doesn’t rise to suit demands because of issues with your suppliers.
Can You Reduce Backorders?
Once you understand the backorder meaning, as we described above, and you’ve seen the difference between backorder vs out of stock, you may still need to reduce your risk of backorders as much as possible. If you do have a lot of backorders, there is always a risk that your bottom line could suffer if people don’t want to wait for the items they want.
One way to reduce the issues of backorders when selling through Amazon, Apple pay, a distributor, or your own online store, is to invest in the right range of safety stock options. Safety stock will ensure that you can continue to deliver the right order fulfilment experience when demand changes. You can also use your inventory management software to help you order the right levels of stock just in time for potential increases in demand.
Some inventory tracking tools can track increases in demand in real-time and suggest reorder points based on the lead time involved with getting your products from your suppliers and through to your fulfilment services. A reorder point is something you can calculate for yourself too, by checking the minimum quantity of any SKU you need to have on hand before ordering more products from a manufacturer.
Lots of order fulfilment solutions make it easier to track the best possible times for reordering items, so you can access this information without a lot of formulas and confusion on your side.
Handling Backorders as a Retailer
Aside from being well-prepared reducing backorders as a business leader can be a process of making the right connections with other professionals and groups who can help you to stay ahead of the curve. For instance, if you’re concerned you might have an issue with sending the right number of products to customers by a certain shipping date, you could consider partnering with multiple suppliers.
Working with multiple suppliers has both advantages and disadvantages. You may have more expenses to consider, but you at least have a backup strategy in place if there’s a reason your primary supplier can get products to you on time.
Similarly, ordering a higher amount of stock for your most valuable products is often a good idea. Just make sure the stock in question has a good selling life. If you’re going to have to sell the product immediately to maintain its value, and you don’t know if demand is going to go up, then keeping extra inventory on hand can be more expensive than just dealing with backorders.
It’s also worth keeping in mind that some backorders will require special accounting. The sale needs to be recorded on the company’s books as a backorder rather than a fully completed sale. This way, if the customer decides to cancel the order, this won’t affect the bottom line of the company, and there won’t be any need to reconcile accounting records. The company will then be able to place the order with the manufacturer to ensure the goods are delivered.
Getting to Grips with Backorders
Backorders can be a common part of running a business in the online retail world. It’s often difficult to predict exactly when increases in demand will take place. A backorder system is a good thing to have in place just in case you encounter this problem.
Backorders are for goods and services that you can’t deliver immediately because of lack of supply and other issues. However, this doesn’t necessarily mean that your items or services are going to go out of stock. Additionally, though backorders are sometimes complicated to handle from a professional point of view, they can be a positive insight into your company’s rising demand too.
Good luck handling your backorders, and make sure you’re prepared for those demand boosts.