Picture this. A customer discovers a product ad on social media and navigates to your website to make a purchase. Their expectations for quick fulfillment are high. But unforeseen circumstances place the product on backorder, requiring waiting multiple weeks for delivery. The disappointment is immediate.
Customers rarely want to wait for backordered items, underscoring the critical relationship between stock levels and your bottom line. Recognizing this connection can help to identify weaknesses in inventory control and demand forecasting. It guides companies in developing strategies that enhance stock availability and optimize ordering processes, ensuring products are readily available when customers want them.
Here’s everything you need to know about reducing backorders and how Fishbowl can help optimize inventory control to keep in-demand items on hand for customer satisfaction.
What does it mean when something is on backorder?
Backorders happen when you run low on inventory on a specific stock-keeping unit (SKU). The item might be in the midst of production or scheduled for production but not yet available for shipment. Backorders typically arise when inventory levels fail to meet customer demand, possibly due to dynamic changes in preference or unexpected order spikes.
In these situations, companies continue to offer the product while placing an order with a supplier for additional stock. The customer’s order will eventually get fulfilled, but only after the new shipment arrives. This process can significantly extend the order’s lead time, potentially frustrating customers.
But how long do backorders take? If the backordered items are already in production during the customer’s order, they may arrive within a week or two. But if your supplier hasn’t begun another production cycle, fulfilling the order could take 3-4 weeks.
Backorders can sometimes reflect positively on demand, especially following a new product launch, but they often signal a need for improvement in your inventory management process. Persistent backorders reveal gaps in predicting demand, managing stock levels, or both, indicating a need to upgrade inventory strategies.
Backorder versus out-of-stock
From an inventory control standpoint, both backorder and out-of-stock mean the same thing — the item isn’t currently available in your inventory. The key difference between them is whether or not the customer can order the item.
When a product is on backorder, customers can still purchase it, understanding there’ll be a shipment delay until you restock it. But when you mark an item as out-of-stock, it’s unavailable for purchase. You might classify an item as out-of-stock if the supplier discontinues and stops producing it, you decide to stop selling it, or you face severe supply chain disruptions that prevent restocking in the foreseeable future.
What causes backorders?
Familiarizing yourself with backorder causes lets you make more informed decisions regarding inventory control and ordering processes. This understanding empowers you to proactively mitigate backorders, improve fulfillment efficiency, and reduce customer dissatisfaction.
Delayed orders from suppliers
Backorders frequently occur when suppliers need to catch up on orders. This situation is common among businesses that depend on manual purchase order reviews or use inaccurate safety stock calculations. While using calculations to guide your reordering strategy effectively prevents overstock and overspending, adaptability to demand fluctuations is still crucial.
High and unexpected demand surges
Backorders often result from sales spikes, which can be particularly challenging to predict and handle for new products. While avoiding overordering inventory for new products due to uncertainty in customer reception is prudent, a product’s unexpected popularity can quickly lead to significant shortages. That’s why monitoring demand trends and adjusting order quantities in real time is vital to balancing inventory levels.
Human errors
Mistakes are an inevitable part of human nature, sometimes leading to backorders and customer dissatisfaction. For example, a retailer might mistakenly process a purchase as a backorder despite the product’s out-of-stock status. While it’s impossible to eliminate all errors, implementing checks and balances can help mitigate them.
A system that actively flags inconsistencies between order statuses and actual inventory levels can prevent errors like processing orders without accurate stock information and failing to update the inventory system. Taking this proactive approach ensures you process orders in alignment with current stock availability, minimizing backorder frequency caused by inaccurate data handling.
Supply chain challenges
Raw material shortages and unexpected factory closures can lead to stockouts and subsequent backorders. Make it a point to keep communication channels with your suppliers open, and encourage them to promptly share any news that might affect your supply chain.
Inaccurate forecasting
Effective inventory forecasting involves analyzing past sales, market trends, and seasonal demand to predict future stock needs. But forecasting errors, often stemming from outdated data and overlooked market shifts, can lead to underordering and product issues.
To improve forecasting precision, it’s essential to use advanced forecasting technologies that offer real-time data and analytics. These tools leverage algorithms and machine learning to process large data sets, enabling more accurate trend predictions and demand projections. For example, a system that adjusts forecasts based on sudden sales velocity changes and external market factors can provide a more nuanced analysis, helping to keep your stock levels synced with demand.
Poor warehouse management
Warehouse management oversees and coordinates daily warehouse operations, including inventory tracking, order fulfillment, and staff management. If you depend on manual processes for these operations or have glitches in your inventory management software, you risk derailing these operations. Data entry issues, for example, can lead to discrepancies between actual and reported stock levels.
The pros and cons of experiencing item backorders
Backorders can be a mixed blessing, and effectively managing them requires balancing meeting customer demands with the realities of your supply chain limitations. By understanding and leveraging their benefits, you can turn their potential setbacks into advantages.
Here are some benefits of allowing backorders:
- Ensures demand for your production run
- Enhances cashflow
- Creates opportunities for customer engagement
While backorders aren’t all bad, you should still approach them cautiously. Allowing customers to place backorders and quickly fulfill them can salvage sales and showcase your brand’s efficiency, but failing to meet expectations can negatively impact your brand reputation.
Challenges associated with backorders include:
- Introduces payment-processing challenges
- Risks increasing canceled orders
- Increases customer service inquiries
Instead of adopting a one-size-fits-all policy for backorders, evaluate each stockout situation individually. This lets you decide whether or not to accept backorders for specific products based on the prevailing market conditions.
How to manage and minimize backorders: 5 best practices
Supply chains vary across industries, but there are universal strategies you can use in any sector to manage backorders effectively. Here are five strategies to minimize backorders and stock the products your customers seek.
1. Create safety stock levels
Consider safety stock as a buffer inventory. If forecasting indicates demand for 1,000 units of a top-selling product, maintaining an additional 10% as safety stock adds 100 extra units to your inventory. Once your inventory quantity approaches its lowest allowable level, act as if the product were out of stock to avoid delays. This extra inventory is essential for addressing supplier issues and unexpected demand surges.
2. Calculate reorder points
Reorder points signal the minimum inventory level at which you need to restock. To determine reorder points, sum up your safety stock with the demand during the lead time. If it typically takes your supplier seven days to deliver an order, plan to reorder a week before your inventory drops into safety stock.
3. Keep an eye on your inventory
Monitoring your current inventory levels can be challenging, especially when using outdated technology and manual methods. These approaches lack the immediacy and accuracy of automated systems, making them prone to human error and delays in updating records. Modern inventory management solutions address this challenge by integrating with various sales and inventory systems, automatically updating stock levels in real time as sales transactions occur.
If you process a sale through an online storefront, for instance, your inventory management system almost immediately reflects this change in the available stock, ensuring accurate inventory levels. This helps prevent stock discrepancies, ensuring efficient inventory control.
4. Secure multiple suppliers
Even if your main supplier is reliable, maintaining relationships with additional partners ensures you have alternatives when disruptions happen. If your primary supplier faces a sudden shortage or delay, for instance, you can quickly pivot to another without disrupting your production process. This preemptive strategy ensures you’re not scrambling for options under pressure.
5. Order more (but not too much)
If you frequently encounter backorders, there’s a good chance you’re just not ordering enough stock. Combat this by reviewing, and possibly increasing, your safety stock levels to meet demand. If historical data shows increased sales during certain months, preemptively increase stock levels accordingly.
However, it’s crucial to maintain a balance to prevent overstocking, which can clutter your warehouse and hinder fulfillment operations. Proper demand forecasting can help you accurately predict future sales, enabling more precise stock ordering.
Easily manage backorders with Fishbowl
Ready to minimize backorders efficiently? Fishbowl, the cloud-based inventory management platform, is your answer. With Fishbowl, monitoring inventory levels, controlling warehouse operations, and integrating sales becomes seamless.
Explore Fishbowl today and start streamlining your warehouse operations.