Backorder: Meaning, Causes, and How to Limit Them
Understanding what backorders mean, their causes, and how to limit them is essential for businesses and logistics professionals. As supply chain disruptions become more common in today’s global economy, managing backorders effectively can make or break a company’s success.
In this article, we explore the ins and outs of back-ordered items to equip businesses with the knowledge needed for effective management.
What Does Backorder Mean?
When inventory is insufficient to meet customer demand, backorders occur as orders are placed but cannot be fulfilled. When stock is insufficient to satisfy all orders, companies may accept backorders, permitting customers to make purchases even if the product is not in store.
In this situation, businesses may choose to accept backorders, allowing customers to place orders even though the item is currently out of stock.
Backorder vs. Out of Stock
While both terms refer to situations where products are unavailable for immediate purchase, there are some key differences between backorders and out-of-stock items.
A backorder implies that the company will eventually receive more inventory and fulfill customer orders at a later date. Customers who have requested an item on backorder can anticipate their order to be shipped when the business acquires more inventory.
In contrast, when an item is labeled as out of stock, the product is temporarily unavailable, with no specific timeline for restocking or fulfilling customer orders. This could result from supply chain disruptions or supplier problems that make it difficult for businesses to predict when they will receive new shipments.
The main difference between these two scenarios lies in how companies manage their communication with customers about availability and delivery times: accepting backorders allows them greater flexibility in managing their supply chain while providing transparency about expected fulfillment dates, whereas labeling products as “out of stock” leaves customers uncertain about whether they should wait or look elsewhere for similar items.
Backorders can be a financial burden for companies; thus, it is critical to recognize what they are and how to keep them from happening. Causes of backorders vary from company to company, but understanding the root causes can help companies take steps toward reducing or eliminating them.
Causes of Backorders
Backorders arise when orders for goods that are not in stock come into a business. The goods may not be in stock due to various reasons, such as supply chain disruptions, supplier problems, or inaccurate inventory management.
This section will discuss some common causes of backorders and provide examples.
Supply Chain Disruptions
Supply chain disruptions can lead to back-ordered items if they affect the availability of raw materials or finished goods needed to fulfill sales orders.
For instance, unforeseen events like hurricanes or earthquakes can cause disruptions in the supply chain by damaging production facilities and transportation networks, thus leading to back-ordered items.
Supplier Problems
In some instances, supplier issues like economic hardships or production complications may lead to delays in product delivery and result in backorders. If a key supplier goes out of business unexpectedly or experiences production setbacks due to equipment failure or labor disputes, companies may struggle to find alternative sources quickly enough to meet customer demand.
Inaccurate Inventory Management
Poor inventory management systems can also contribute significantly to backorder situations by providing incorrect information about stock levels. Companies need accurate data about their inventory levels so they know when it’s time to reorder products from suppliers before running out completely. Mismanaged inventory could result in excess inventory for some items while leaving others unavailable for customers who want them.
Sudden Increase in Demand
A sudden increase in demand for a particular product can lead to backorders if the company cannot quickly adjust its inventory levels. This could happen due to seasonal fluctuations, promotional campaigns, or unexpected events driving demand.
Companies must closely monitor market trends and customer preferences to anticipate changes in demand and avoid stockouts.
Limited Supplier Capacity
In certain situations, suppliers may have restricted production capabilities, leading to slowdowns when fulfilling orders. Companies should maintain open communication with their suppliers about anticipated order volumes and delivery timelines so they can plan accordingly and minimize the risk of backorders occurring.
Backorders can be generated by various sources, such as consumer requests or supplier shortages. Businesses must comprehend the sources and implications of backorders to handle them successfully. Noting the potential advantages of allowing back orders should not be disregarded.
Benefits of Accepting Backorders
Backordering can provide businesses with an effective means of optimizing inventory levels, thus reducing costs related to excess or inadequate stocking.
Here, we will investigate the advantages of taking backorders.
Improved Inventory Management
By allowing customers to place orders for back-ordered items, businesses can better gauge demand for specific products and adjust their stock levels accordingly. This helps prevent excess inventory while ensuring that popular items are always available.
Better Customer Retention
Rather than turning away potential customers due to out-of-stock items, accepting backorders allows businesses to retain those sales by fulfilling them later. Customers appreciate the option to still order an item even if it’s temporarily unavailable, which can lead to increased customer loyalty and repeat business.
Informed Decision Making
Managing backorders provides valuable data on product demand trends, enabling companies to make informed decisions about production schedules, marketing strategies, and future investments in new products or services.
Increase Sales Opportunities
By accepting orders for out-of-stock items, companies can capitalize on sales opportunities that might otherwise be lost. This helps boost revenue and prevents competitors from swooping in and capturing customers with similar products.
Challenges with Backorders
The main disadvantage of back ordering is that customers may become frustrated if they wait too long for their orders to be fulfilled. This can result in dissatisfied customers, potentially resulting in a loss of business.
Here is a brief analysis of the challenges encountered by businesses when dealing with back-ordered items:
Customer Dissatisfaction
When customers place an order, they expect the product to be delivered within a reasonable timeframe. However, backorders can cause delays in fulfilling orders, leading to unhappy customers who may choose not to do business with your company again or leave negative reviews online.
Lost Sales Opportunities
If your products are frequently on backorder status, you risk losing sales opportunities as potential buyers might opt for readily available alternatives from competitors instead of waiting for your stock levels to replenish.
Inaccurate Inventory Management Systems
An inaccurate inventory management system can contribute significantly towards creating more backorders than necessary. If the system does not accurately reflect the actual stock levels or fails at managing reorder points effectively, it becomes difficult for businesses to manage inventory levels and prevent backorders from occurring.
Supplier Problems & Supply Chain Disruptions
Supply chain disruptions and supplier problems can also lead to increased back-ordered items. These issues could include production delays at manufacturing facilities or transportation-related setbacks such as shipping delays due to extreme weather conditions or political unrest in certain regions where suppliers operate.
Inefficient Order Management Processes
If a company’s order management processes are inefficient, it may struggle to keep up with incoming sales orders and effectively manage its backlog. This can increase back-ordered items, further straining the company’s resources and negatively impacting customer satisfaction.
How to Reduce Backorders
Businesses can manage their backorders by setting realistic customer expectations, monitoring inventory levels, and communicating regularly with suppliers about availability and delivery times.
Check out some valuable tips and tricks for limiting the issue of backorders for businesses and clients.
Set Reorder Points
To effectively manage inventory levels, it is essential to set reorder points based on historical sales data. This helps ensure that stock is replenished before it runs out completely, reducing the likelihood of back-ordered items.
Implement Inventory Management Software Systems
Inventory management software systems help track stock levels in real time, allowing businesses to make informed decisions regarding purchasing and production. By having a proper inventory management status, companies can prevent backorders from occurring due to insufficient stock.
Maintain Open Communication with Suppliers
Poor communication between suppliers and businesses often leads to supply chain disruptions. Establishing open lines of communication ensures that any potential supplier problems are addressed promptly to not affect product availability or lead times.
Improve Sales Forecasting Accuracy
Better sales forecasting helps businesses anticipate customer demand, allowing them to adjust production and purchasing accordingly. By accurately predicting future sales orders, companies can minimize the occurrence of instances when demand exceeds supply or vice versa.
FAQs
If you have back-order inquiries, we’ve compiled a FAQ to help address some common queries.
How long does backorder usually take?
The time it takes for a back-ordered item to be fulfilled can vary depending on the product and supplier. Backorder fulfillment time can range from a few days to weeks or months. It’s essential for businesses to communicate realistic delivery times with their customers and provide updates if there are any changes in the estimated fulfillment date.
What happens when an order is back ordered?
When an order is placed for an item currently out of stock, it becomes a backorder. The customer will typically receive a notification that their desired product is unavailable but will be shipped as soon as inventory becomes available again.
Businesses should keep customers informed about their backorder status, including any potential delays or changes in expected delivery dates.
Are backorders guaranteed?
Backorders are not always guaranteed since they depend on supply chain disruptions and supplier problems. However, many businesses do their best to fulfill all accepted orders by working closely with suppliers and implementing effective inventory management systems.
Sometimes, companies may offer alternative products or refunds if they cannot fulfill the original order within a reasonable timeframe.
What are the reasons for backorder?
Here are some reasons why you can experience backorders:
- Supply chain disruptions: Unexpected events, such as natural disasters or global pandemics, can cause significant delays in the supply chain and lead to backorders.
- Supplier problems: Issues with suppliers, like production delays or quality concerns, may result in a lack of available inventory for certain products.
- Inaccurate demand forecasting: If businesses underestimate customer demand for specific items, they may not have enough stock on hand to fulfill all orders promptly.
- Poor inventory management: Inefficient systems for tracking and managing inventory levels can contribute to an increased number of backordered items.
Limiting these issues can be very beneficial to the company and enhance profitability and growth.
Conclusion
Understanding the backorder meaning and causes is essential for businesses to manage their inventory levels effectively. You can accept this process to benefit from increased customer satisfaction and reduced excess inventory. However, when backorders happen, it comes with challenges such as supply chain disruptions and managing a company’s backlog.
To reduce backorders, companies should set reorder points, have contingency plans in place for supplier problems or other supply chain issues, and utilize inventory management systems.
Visit Inbound Logistics to learn more about supply chain and logistics solutions.