What are backorders? Definition, reasons, how to avoid them 

8 MINS
Eunice Asuncion

Running a business comes with its fair share of inventory challenges, and one of the most common challenges is dealing with backorders. A backorder is when a customer can still buy an item even though it’s not currently available, and they’ll get it once it’s back in stock. This is different from items that are just “out of stock,” where you can’t buy the item at all until it’s available again. More and more businesses are facing this backorder situation. It can happen more often for several reasons, like a sudden increase in customers wanting certain items.  

So, with more items on backorder, how can businesses keep up and stay ahead of the game? This question is important for any business that wants to keep selling and make its customers happy, even when things get a little tricky. 

What does a backorder mean? 

In the world of business and retail, backorders are like taking orders for a dish that’s run out in a restaurant but promising your customers it’ll be back on the menu soon. When a product is on backorder, it means that while the store doesn’t have it in stock at the moment, they’re still taking orders for it. Customers can buy the item now, and it’ll be shipped to them as soon as new stock arrives. This setup keeps the sale going even when the product isn’t immediately available to hand over or send out. 

Common reasons why backorders happen 

Backorders can be tricky for businesses, often happening when they least expect it. Let’s explore the reasons why products might end up on backorder. 

Increased demand 

Imagine a situation where a new video game or a trendy pair of sneakers suddenly becomes a must-have item. Everyone wants to buy it, which leads to a surge in demand that the stores didn’t see coming. This rush can cause the shelves to empty faster than expected, resulting in inventory shortages. The challenge here is predicting these sudden spikes in interest, which can be tricky even with the best planning. It’s about trying to forecast demand accurately, but surprises can still happen. This makes it hard to always have enough items in stock to meet this unusual demand.

Production delays 

Sometimes, the problem starts even before the products reach the store. Delays in manufacturing, such as a factory slowing down because it can’t get enough materials or because of equipment issues, mean that products are not made on time. This situation can lead to backordered items because the supply chain gets backed up. That’s why it’s crucial for businesses to make their production processes as efficient as possible. Streamlining production processes helps prevent delays and ensures a smooth flow of products from factories to customers. 

Inventory management issues 

Managing inventory is a bit like trying to have just the right amount of food in your fridge—not too much so it goes to waste, and not too little so you run out. If a business doesn’t have a good system to keep track of what’s in stock, it can easily end up with backordered items. Modern inventory management systems can help by providing real-time updates on what’s available and what’s running low. This tech-savvy approach allows businesses to make quick decisions, like ordering more stock before running out, and helps prevent backorders by keeping a closer eye on inventory levels.

How backorders affect your business  

As you explore the reasons why backorders happen, it’s important to consider their impact on your business. While offering items on backorder may seem like a solution, it’s essential to understand both the advantages and disadvantages. If not managed effectively, backorders can present significant challenges. 

Customer dissatisfaction  

Customer dissatisfaction is one of the most immediate effects of backorders. When customers are excited about a purchase only to find out they have to wait longer than expected, it can lead to frustration. This disappointment can result in negative reviews and social media feedback, which can harm your brand’s reputation. Over time, these missed expectations might weaken brand loyalty, making customers think twice before making future purchases.  

Operational challenges  

Managing backorders can complicate your operations significantly. The costs associated with fulfilling these orders can increase, as you might need to expedite shipping or handle separate shipments for single orders. Additionally, keeping track of what’s on backorder and communicating with customers about expected delivery times adds administrative burdens. There’s also the potential loss of control over your inventory management and customer service quality, as dealing with suppliers and shipping logistics becomes more complex.  

Financial losses   

Backorders can also lead to financial losses for your business. While they can increase cash flow in the short term, the long-term effects include reduced sales if customers decide to cancel their orders or purchase from competitors who can fulfill orders immediately. Also, if having too many items on backorder means you run out of other products because they use some of the same parts or resources, you could lose out on making more sales. All these problems added together can affect how much money your business makes and its ability to grow.  

Understanding these impacts is crucial for managing backorders effectively. By addressing these challenges proactively, you can minimize the negative effects and leverage backorders as a strategic tool for your business. 

Advantages of selling on backorder 

While backorders might seem like a challenge at first glance, they can offer several strategic advantages for your business. This approach not only helps in more efficient use of storage and reduces warehousing costs, but also enhances product demand and boosts cash flow. Here’s how backorders can turn a challenge into a significant opportunity. 

More storage spaces 

Selling on backorder means that you don’t have to stockpile products in anticipation of future sales. This approach frees up valuable storage space to allow for a more efficient use of physical inventory areas. You can then use this extra space for more critical needs or to store a wider range of products with less risk of overstocking. 

Reduced warehousing costs 

With fewer products requiring storage, the costs associated with warehousing significantly decrease. This reduction includes savings on the rent or purchase price of storage facilities, lower utility expenses for maintaining the right conditions (like temperature and humidity), and decreased spending on security measures. These savings can improve profit margins or fund other areas of your business. 

Higher product demand  

Backordered items often carry a perception of high demand, which can make them seem more valuable to consumers. This perception can lead to increased interest and urgency among potential buyers, who may fear missing out on the product if they wait too long. This strategy can be particularly effective for new or limited-edition products, which drives sales even before the items are physically available. 

Increased cash flow  

When customers place orders for a backordered item, they typically pay at the time of purchase. This provides you with immediate cash flow. This influx of cash can be especially beneficial, as it comes in before you incur the costs associated with manufacturing, acquiring, or shipping the products. This advanced funding can help cover those costs when they arise, reduce the need for loans or other financing, and provide liquidity to support other business operations or investments.

4 simple tips for avoiding backorders 

Navigating the complexities of backorders requires a proactive approach to inventory management. Implementing these practical strategies can help you maintain a balance between meeting customer demand and managing your inventory effectively. 

Forecast demand accurately 

Start by predicting how much of your products will be needed in the future. Use data analysis, market research, and trend watching to predict customer demand more accurately. This approach can help you prepare for what your customers will want before they even ask for it and reduces the chances of running into backorders and out-of-stock items. This careful planning can also prevent excess inventory, ensuring you don’t tie up resources for unsold goods. 

Cultivate effective supplier relationships 

Building strong, transparent relationships with your suppliers is key. Keep open lines of communication about your needs and their capabilities. Manage lead times carefully and collaborate on planning to avoid surprises that result in back-ordered items. A collaborative approach with multiple suppliers ensures you’re both on the same page and can react quickly to any changes in demand or supply chain issues. This strategy is vital for accepting backorders confidently, knowing you can rely on your supply chain to meet customer demand. 

Enhance order fulfillment efficiency 

Streamlining your order fulfillment process can significantly reduce the risk of backorders. Look for ways to make your processes faster and more accurate, minimizing errors that can lead to product shortages. Leveraging technology, such as automated inventory management systems, can help keep track of stock levels in real time and speed up the fulfillment process. 

Ensure clear communication  

When backorders are unavoidable, clear communication with your customers becomes crucial. Inform them about potential delays as soon as possible, offer alternatives if available, and set realistic expectations for delivery times. Being upfront and honest about the situation can help maintain customer trust and satisfaction, even when facing backorders, and manage backorders effectively to fulfill backorders with minimal impact.

Navigate backorders with effective solutions 

Backorders are a common challenge in retail and business, but with the right strategies, they are entirely manageable. The key to handling backorders effectively lies in proactive planning, leveraging a robust inventory management system, and maintaining clear communication channels with both suppliers and customers. By optimizing your safety stock and ensuring immediate shipment when goods become available, you can enhance resilience and responsiveness to market fluctuations. This approach not only helps navigate backorders but also turns them into opportunities for refining your inventory practices and improving customer interactions.  

Take the tips and ideas we outlined in this article to effectively manage backorders and turn potential challenges into opportunities for growth and customer satisfaction. 

  • Eunice Asuncion

    Eunice is a Content Marketing Specialist at Web.com. With over three years of writing experience, she uses the power of valuable content to not only inform but also inspire growth and success for individuals and business owners in the digital landscape.

Leave a Comment

Trending Topics