This article was updated in March 2023 to reflect current trends, statistics, and contemporary information.
Effective inventory control is a balancing act between reducing the costs of holding too much inventory stock with the need to maintain enough stock to meet customer demand.
Stockouts in many cases lead to lost sales and customer dissatisfaction but what if there is a customer order that cannot be immediately filled but for which the customer is prepared to wait? Or perhaps you can ship part of a large order to customers that prefer to receive the available in-stock items and are happy to wait for the balance of stock.
What is an inventory backorder?
An inventory backorder is when a customer places an order or makes a purchase for inventory stock, that is not yet available. Inventory backorders can occur when products have sold out due to times of unforeseen high demand and all your safety stock has sold.
Customers may even be happy to shop for your products knowing you don’t have the stock on hand — for some businesses, backorders are viewed as guaranteed sales, particularly if you have a loyal customer base that is willing to wait for your products. However, with backorders, there is no guarantee that customers will not cancel the order and your business is left holding the stock purchased to fulfil these backorders.
If prepayment is taken prior to the order being filled and your supplier is unable to fulfil the order or there are further delays, you risk the time and expense of refunding payments. This, in turn, has the potential to negatively affect your business through customer dissatisfaction and bad word-of-mouth.
What is a backorder rate?
When managing backorders, it’s important to be aware of your backorder rate. This figure looks at how many of your orders cannot be fulfilled when a customer makes them.
If you have a high backorder rate, this means your customers will be waiting extra time while you try to fill their order. If they have to wait a long time, this can impact their overall experience, satisfaction level and loyalty. Try to keep your backorder rate low and customer satisfaction levels high.
The impact of backorders on inventory control
Placing backorders means having orders that you can’t fulfil or receiving orders that are larger than on-hand inventory stock. You may even receive a sales order where one or several items are out of stock. For single items, you can simply create a new purchase order for the single product and inform the customer when the backordered item will arrive.
However, if you are managing hundreds or even thousands of different sales orders in any given week, backorders can become a logistical and inventory control nightmare. If you have several out of stock items from different suppliers, fulfilling these backorders means keeping a record of all your sales orders with items on backorder and placing purchase orders for these items.
Once the stock has arrived sales orders need to be matched to the correct purchase order and the backorders fulfilled. For a variety of backordered products across multiple orders, this becomes a mammoth task.
If backorders are a frequent occurrence, it may be time to evaluate your inventory control procedures. Reliable inventory control or cloud-based inventory management system is the best tool to automatically manage backorders. The software can analyse historical ordering data to help identify par levels for reordering. Cloud-based inventory systems also have the capability to automate the purchase order process for you.
Managing inventory backorders
The most important aspect of managing inventory backorders is to meticulously manage your customers’ expectations. When you are unable to immediately fulfil their requests or anticipate any delay, quickly communicate this to your customers and provide a new estimated delivery date.
Update your website immediately so that your customers can see why the product is unavailable and what actions you are taking to resolve the issue. Ensure that your contact information is prominently displayed on your website and apprise your customer service team of the potential customers calls and emails regarding the backordered product.
Evaluate the timeframe of fulfilling backorders — how quickly can suppliers get the new stock delivered to you? Can the orders be dropshipped? Dropshipping backorders means your supplier will fulfil these directly to the customer, further cutting down your customers’ waiting time.
With a reliable inventory control system, you can easily track and manage backorders to ensure your customers are not left waiting long. Better still, with cloud-based inventory systems, you can reduce the occurrence of inventory backorders in the first place.