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A backorder is an order for a good or service that is sold out and therefore cannot be fulfilled currently due to lack of availability. In comparison, a product that is listed as out of stock means that it is not possible for a customer to buy it because you simply can’t order any more.

Why Do Backorders Happen?

Imagine for a moment that a customer wants to place a large order with your company. After you process their payment, you make the horrific realization that your inventory management system wasn’t updated. The product is in backorder, and now you have to explain to an important client why it isn’t in stock.

Unfortunately, these types of experiences are far too common for small- and medium-sized businesses (SMBs). As a retailer or manufacturer, you need the best support possible to track inventory, locate necessary products, and give your customers inventory forecasting estimates about when their purchases will show up.

Having additional units on backorder is fairly common with just-in-time inventory systems, especially when introducing new products because there is no sales history available for accurate sales predictions.

Backorders can also occur when a company forgets to order stock in time. Sometimes, vendors run out because of spikes in demand. Order delays can occur because of inaccurate forecasting by the company, supplier-related issues, manufacturing delays, supply chain disruptions, shipping problems, and natural disasters.

By allowing customers to order these out-of-stock items, you can continue to sell popular products and generate revenue. However, expectation management is key. Customers need to be aware that the incoming product will take longer. Otherwise, your customer satisfaction rates will plummet.

Benefits of Allowing Backorders

These order backlogs may be inconvenient for customers, but they allow your business to garner more sales. By allowing backorders in your inventory management software, you can enjoy a few key benefits.

• Better Sales and Revenue: You can bring in additional sales and revenue for items you don’t currently have in stock.
• Improved Cash Flow: Accepting payment for future shipments improves your cash flow. You can reinvest those payments in your company’s operations, marketing, or other shipments.
• Lower Storage Costs: This technique reduces the cost of storing inventory because you’re selling products before they arrive and have to be physically stored.
• Increased Buzz: Having a backlog of items ordered creates buzz and showcases the desirability of your products to customers. Because a backlog is a sign of healthy demand and a growing economy, it is tracked for the economy as a whole in the backlog of orders index.
• Enhanced Insights: Allowing customers to order currently unavailable items gives you better insights into the types of products people want to buy.
• Higher Customer Loyalty and Retention: As long as you communicate transparently about the delay, the orders can boost your customer loyalty and retention. Your customers can access in-demand products they can’t find immediately available anywhere else.

Drawbacks of Having Backorders

Although there are benefits to having items on backorder, they can also lead to potential problems.

• Lower Customer Satisfaction: While giving customers access to in-demand products can often boost satisfaction, it is a double-edged sword. If the backorder is late or there are any communication issues with the client, it can lower customer satisfaction rates.
• Higher Cart Abandonment: When orders take a long time to arrive, customers are less likely to place an order. In fact, 21% of cart abandonment instances are due to delivery speeds being too slow.
• More Cancellations: If it takes a long time for the order to ship and arrive, your client has extra time to cancel the order. Even if they no longer want it, you still have small business inventory management and bookkeeping tasks to handle because of the original order.
• Increased Overselling Risks: Since you don’t have the existing items on hand, there’s always a chance that your supplier will sell their stock to another company. As your percentage of items on order increases, your risk of overselling products also grows potentially leading to more backordering.
• Lower Market Share: If other businesses do a better job of providing products in a timely way, it can decrease your market share and drive existing clients to your competitors.

Handling the Backorder Lifecycle From Start to Finish

New technology makes handling delayed orders easier than ever before. In one study of using AI for order fulfillment, the technology was able to predict future backlogs with 73% accuracy up to a week before they happened.

As an SMB, you have to manage all aspects of the backorder lifecycle. From managing expectations about restocking to creating safety stock for preventing future issues, there are a few key steps you can take to ensure a positive customer experience and prevent unnecessary delays.

The lifecycle of backlogged orders includes key steps for preparing and preventing issues, managing problems, and mitigating future order delays.
 

1. Preventing and Preparing for Potential Delays

First, your company should find ways to prevent delays from happening, such as using an inventory management system. Because some delays will still inevitably happen, it’s also important to prepare your company’s response to future delays by setting up clear policies and calculating accurate reorder points.
 

Set Up an Inventory Management System

The first thing you should do is set up an inventory management system, so you know which products you have and which ones you need to order. When a company is small and only has a few products for sale, it can deal with a backorder in the supply chain by simply tracking inventory levels and orders by hand. As your company continues to grow, you need a more advanced inventory management system. For instance, our barcode inventory software allows you to scan any barcode and immediately see the quantity on hand.

With the right inventory management software, you can scan, take pictures, and immediately update your inventory. You don’t have to worry about unintentionally running out of products because your software can be updated with set reorder points and up-to-the-minute inventory levels.
 

Create a Company Backorder Policy

To manage the lifecycle of your out-of-stock products, you need to create a policy on how to handle each item on order. Your company must consider:

• Choose When to Charge Customers: Some companies, like Amazon, charge customers immediately when they place an order. While this approach boosts your cash flow and revenue in the short term, it does increase the likelihood that you’ll need to process a refund if the order is canceled later on.
• Remember the State and Federal Laws: Each state has different rules about when you must ship products after charging customers. Under the Federal Trade Commission’s (FTC) Mail, Internet, or Telephone Order Merchandise Rule, you are legally required to ship the item within the timeframe you told the client. If no timeframe is advertised, you have 30 days to ship products.
• Refund Payments: Companies that charge customers upfront must be prepared to refund clients if the backordered item doesn’t ship on time. The FTC legally requires businesses to either refund products that don’t ship on time or get the customer’s consent for the delay.
• Update Your Accounting Records: If you have charged and refunded the client for their back order, both of these activities must be carefully accounted for in your accounting records. Because of this, some companies choose to go the easier route and wait for the delayed products to arrive before charging the customer. This allows you to avoid refunds, but it does increase the likelihood that the customer may decide to cancel the order.
• Consider a Waitlist: For your most in-demand products, you may want to set up a waitlist for interested customers. This type of approach simplifies your accounting needs and ensures you have ready buyers when the order eventually arrives.

Evaluate Your Reorder Points

If you frequently have a backlog of orders, it’s time to reevaluate your business inventory management. Most likely, you need to adjust your reorder point. For example, a plumber who frequently runs out of kitchen faucets may need to reorder faucets when they have 10 left instead of waiting until only 5.
 

2. Manage Your Backorders

When order delays inevitably occur, you need to be proactive about how you manage them. Setting clear expectations with customers and transparent communication will improve customer satisfaction.
 

Set Expectations

The most important part of managing back orders is to communicate transparently. You must set expectations about the ordering process and when the item will arrive. Besides informing customers about delivery timelines upfront, you should set up drip emails that arrive at different stages in the ordering, shipping, and delivery process.

For example, it’s generally a good idea to send email notifications at the following points in the process.

• 1 Week: Confirm the product’s estimated arrival time with the customer.
• 2 to 4 Weeks: Give the customer an update. If the product is further delayed, offer an alternative to the customer.
• At the Limit of the Policy: At the end of your company’s policy on order delays, cancel the backorder. If you have already charged the customer, this is the point when you should refund them.

Be Transparent

If the order won’t be arriving for a month, the customer needs to know because they’ll find out eventually. The best option is to inform customers about delayed items before they make the purchase, so they have the option of choosing whether they want to wait or not.
 

3. Mitigate Future Delays

Finally, your business should find ways to mitigate future issues. By reviewing your safety stock, using forecasting tools, switching vendors, and adapting your accounting methods, you can make future stockouts and backordering easier to navigate.
 

Consider Safety Stock

While having some unavailable products can make your company appear more appealing to consumers, you can easily have too much of a good thing. Rather than drive loyal clients to your competitors, consider keeping safety stock on hand. This technique works more effectively if you have extra space and don’t have high holding costs.

Safety stock is basically your buffer between sudden increases in customer demand. When customers can’t find what they want, 43% of customers will go to a different store to find the same product. Just 7% to 25% of customers will still buy the product if it’s out of stock.

By calculating safety stock, you can mitigate the impact of demand forecast issues and ensure customers have an excellent experience. More importantly, having the right stock on hand keeps your customers from moving to your competitors. Once you have your lead time, forecasted demand, and service level goals, you can start calculating the amount of stock you should keep on hand to avoid backordering.
 

Adopt Forecasting Tools

You can install forecasting tools as a part of your inventory management system or through a separate platform. Predictive analytics and next-gen AI make forecasting future inventory levels extremely accurate.

As a business, you can use multiple techniques for inventory forecasting. You can use qualitative forecasting, quantitative forecasting, or a combination of both. While quantitative data relies on hard numbers to make future predictions, the drawback is that the forecasts are only as good as the data.

Meanwhile, qualitative forecasting is often used with new businesses that don’t have enough data yet. This style relies on subjective measures, which can greatly impact the outcome.

Combination forecasting involves the best of quantitative and qualitative forecasting. While this often leads to exceptional results, it can also be a time-consuming method for businesses.
 

Consider Working With New Vendors

While a few out-of-stock products can help generate buzz and excitement, you don’t want this to happen too frequently. There are many competitors available, so customers can just work with someone else if they are tired of shipping delays. If your current vendors frequently have product delays and out-of-stock products, it may be time to consider working with a more reliable vendor.
 

Frequently Asked Questions

Over time, we’ve heard a range of common questions about inventory management. The following are just a few of the most frequent queries we receive about order backlogs.
 

How do backorders work?

While each company is different, the process generally begins when a customer tries to buy a product. If the product is unavailable, the customer is given a chance to place a back order. Although some companies charge customers right away, most businesses wait until the product is ready to ship. Throughout the process, the client should receive a steady stream of email updates so that they know when the product will arrive.
 

What is another name for a backorder?

Often, people refer to them as inventory backlogs or products on order. No matter what it is called, backorders involve a good or service that is currently unavailable.
 

How long do backorders usually last?

Each supplier is different, so the timeline can vary greatly. While many orders take only a few weeks to fulfill, it can take multiple months for a product to move through the supply chain.
 

What is the difference between backorders vs. out of stock?

When you have an item on back order, it means that the product will still come. However, it will end up arriving later than normal. In comparison, out-of-stock orders are completely unavailable. Even if a customer wants to place a future order for them, they can’t.
 

What is an example of a backorder?

For instance, technology products and new gaming systems are common things that go out of stock and consumers have to place a backorder for. Popular trends, like Crocs, Stanley mugs, and similar items, often sell out quickly, so customers have to place an order for future shipments often followed by a waiting period.
 

What is a backorder vs. a preorder?

Ultimately, these two terms are fairly similar. They both represent times when a customer has to place an item on order. However, a preorder is for items that aren’t available at all yet, such as a new line of clothes or a book release. Meanwhile, a backorder refers to items that are normally available for sale but are temporarily out of stock.
 

Navigate SMB Backorders With Nest Egg Inventory Solutions

While having items on order can help your company appear to be more desirable and in demand, long delays can sour customer experiences and lead to more cancellations. Because of this, it is essential to manage any backorders with transparent communication and empathy.

To manage a backlog, it pays to have a top-rated small business inventory app on your side. At Nest Egg, our barcode inventory management system helps you track and manage your stock and set ideal stock levels.

Because the platform is designed to be intuitive, you don’t need special experience to understand how it works. You just have to scan the inventory, and Nest Egg will quickly populate the inventory database with updated information. Since the inventory is instantly updated, you never have to worry about whether something is actually available or not.

All of your inventory is easily trackable through Nest Egg’s smart taxonomic features and cloud-based dashboard. You can easily update contact details about your suppliers, track purchases and sales, and generate barcodes and QR codes. The entire system can be adapted to all types of small and large businesses, giving you better asset visibility and a customized and automated approach to inventory management.

If you’re looking for a top tool for managing and reducing backorders, we can help. Try Nest Egg today!