Backorders Definition and Backordering Best Practices - Financial news

Backorders Definition and Backordering Best Practices

For retailers who manage just enough stock, Backordering is a boon. After all, it is great business when you have more orders than you have products for! Yet, very few retailers get it right in the first go, resulting in lost sales and disappointed customers.

Suggested reading: What is inventory management?

Since the very aim of backordering is to help you sell and NOT lose a customer to another retailer, the after-sales experience matters tremendously in developing a repeat purchase pattern. However, if you are scared of backordering or if it has backfired on you before, it is time to rethink what went wrong and take a more sophisticated approach.

What is backordering?

Backordering is when you place or accept, an order for a product that is out of stock. Instead of showing up as ‘sold out’ on your website, the product can be bought by a customer. Once they place the order, you figure out a way to replenish stock and get the order delivered as soon as possible.

Backordering is a necessity for low stock businesses as it helps you manage inventory more efficiently.

Why run a low stock business?

Zero working capital.

Your customers pay for your suppliers. Sometimes you can even run on negative working capital if your customers pay in advance and you get a credit period from your suppliers.

Retailers in the apparel industry see this trend quite often. Suddenly, a theme catches on and everyone is selling fringes, or tassels, or off-shoulder dresses. In such a scenario, it takes a while to replenish stock from your vendor, especially if the vendor is catering to the same fashion storm across many retailers.

Secondly, and this is very important, backordering is not just something you can, or should, so when you actually run out of stock. You can use it to come to a place in your business where you don’t have to handle any stock at all.

If your supplier cycles are fairly dependable with very little variance, it helps you spend less and less on inventory, until inventory costs are virtually eliminated. This is the true purpose behind the practice. Selling without investing in inventory is every retailer’s dream, and backordering can make it real.



Backordering Is A Tricky Conundrum

Perhaps you are now convinced that you must indeed try this practice out. If it is a way to make more sales and not lose customers, you want to try it, right?

Which is why we will now play the devil’s advocate.

Imagine that you get two orders in a day. Each order has three items, and one of the three is out of stock currently. Your consumer has been able to order as you allow backordering. You now need to isolate the two items that you don’t have, get in touch with the respective vendors and raise a purchase order.

Now, imagine doing this for two hundred orders. Some gravy there, isn’t it? A spreadsheet will simply not do to keep track of all of these order items, raise purchase orders in time, and intimate consumers of a delay in their shipment. You also need to take a call on whether you intend to make the whole order wait to receive the one item that is out of stock.

“So, are you not recommending backordering now?”

Of course not! We just say that there is a smart way to make it work for you. And we are letting you know that for backordering to work, you need to have a very good idea of

  • how long each of your suppliers takes to fulfill a purchase order
  • whether your consumers perceive the product as being ‘worth waiting for’
  • whether you want to offer returns on a product that has specifically been ordered for a certain customer.

How To Handle Backorders

  1. Tell Customers What You’re Up To

    The tricky thing about handling backorders is that you allow sales from an inventory that effectively does not exist with you.

    If you wish to try out backordering for a few products (and their vendors) at a time, sort them all into a new page on your website. These items are essentially going to take longer to ship.

    You can think of innovative names for the page, such as “Love Takes Time” For Body Care products, or “Robes In The Making” for apparel. A short, two-line description can mention that all of these products are going to take longer than usual to be delivered as they are made-to-order.

    This way, you are making the consumer aware even before the sale and making them an important part of the buy-and-sell equation. If they truly wish to buy the product, they know when to expect its delivery. This way, you build trust and also set the right expectations in one go.

    Use a purchase order management software like Primaseller where you can control the pace at which backorders add up and form a PO for your supplier and even email them at automated frequencies.

  2. Buffer Your Purchase Orders

    Since time is of the essence in a backordered item’s delivery, but too many POs will drive your suppliers crazy, how about you reduce that as much as possible?

    In a typical backordering process, you receive an order for an item you don’t usually stock, you raise a purchase order, receive the product and then ship it.

    However, if you allow your sale orders to pile up as backorders till a certain minimum quantity is reached before you raise a PO on a daily or weekly basis, you will not only reduce the number of purchase orders, you will even be able to negotiate better bulk rates basis the sheer perception of larger orders.

    Again, this is why step 1 is important. Set the right shipping expectations and take one thing off your mind. Instead, wait for a minimum number of backorders to be placed before you reach out to your vendors.

  3. Deal With Anxious Customers

    The predominant trend in retail, thanks to Amazon, is that every product can and will be received ASAP. You know this isn’t possible. Your customer knows this too, but they are anxious.

    A well-designed ‘Product Journey’ offering can help you here. On your site, you can offer tracking to help the customer ‘see’ their product’s journey. You can send email or SMS alerts whenever the product moves ahead. Constant communication helps consumers feel like they are in the loop. It also saves you time in answering anxious phone calls and complaints.

    Remember, the customer’s anxiety may be an inconvenience for you. But they have paid for a product, probably for the first time on your site. They don’t know what to expect. By maintaining constant communication, you can build a bond of trust. Rest assured, when they have a good experience, they will recommend your store far and wide.

  4. First In, First Out

    Here, we’re referring to the sequence of orders and not the inventory. Always fulfill orders in the sequence that you received them in. This way, you ensure uniform fulfillment times, and you don’t forget to fulfill orders from an earlier time.

    Also, choose how long you will wait before raising a purchase order. Usually, a weekly timeline works well. In a given week, if you receive very few orders, you still go ahead and raise a purchase order with your vendor. This way, no one is kept waiting for too long.

    The following week, if you have many orders that a single vendor can fulfill, you may consider raising a purchase order earlier and intimate your vendor of the same. Any method you follow will take a bit of time to get into the rhythm. See what fulfillment method works best for you and your vendors.

Do it right, and backordering is the utopian dream of every retailer. Make mistakes, and you’ll soon find yourself in an operational nightmare. Before you begin, ask yourself these questions:

  • Do I have reliable suppliers who can give me the products I need, when I need them?
  • Is this a product, or an irresistible deal, that customers are willing to wait for?
  • Since the fulfillment period is longer, how do I handle cancellations and a ‘change of mind’?
  • Do I have the resources to allow returns and replacements on a product with longer fulfillment times?

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