What Does A Backorder Mean & What Causes Them
Businesses need to find the right balance between keeping enough stock and not keeping too much. This is easier said than done (inventory management is a huge topic), and many businesses will find themselves out of stock, which is far from ideal when demand is still there.
To be fair, there are numerous potential reasons why an item can be out of stock, some of which are out of your hands. But before we dive into those, first let’s define backorders.
What Is A Backorder?
A backorder occurs when a customer can order a product despite being out of stock, to receive the product once it’s available. The approach is known worldwide because it helps your business continue generating revenue despite not having inventory available.
Now, let’s take a look at some of the most common reasons you might run out of inventory.
Reasons Why You May Run Out Of Inventory
Human Error
Among the most common reasons for running out of stock is human error. A busy store will receive multiple orders across its product range, and it can become easy to make an innocent but potentially costly mistake.
One way to help prevent human error is to automate tasks where possible, which will also help to reduce time spent. Another solution is to outsource your inventory management so you know it’s in the hands of experienced professionals.
Supplier Problems
Many businesses also run low on stock because they have issues with their suppliers. Such issues can be caused by reasons ranging from poor standards to supply chain problems. Here are some of the issues you can run into with suppliers:
Quality Control Issues
Suppliers may deliver subpar or defective products that do not meet the required standards. This can result in delays, rejections, or even recalls, leaving you with insufficient inventory to meet customer demands.
Inconsistent Supply
Suppliers may struggle to maintain a consistent and reliable flow of products. They might face production issues, raw material shortages, or difficulties in meeting delivery schedules, causing disruptions in the supply chain and leading to inventory shortages.
Communication Breakdown
Poor communication between you and your suppliers can result in misunderstandings or misalignment of expectations. This can lead to delayed shipments, incorrect quantities or products, or missed deadlines, ultimately impacting inventory levels.
Financial Instability
Suppliers experiencing financial difficulties or bankruptcy can suddenly halt operations or fail to fulfill orders. This can leave you without a source of inventory, forcing you to find alternative suppliers or face stock shortages.
Overdependence on Single Suppliers
Relying heavily on a single supplier poses a significant risk. Any issues that affect that supplier, such as natural disasters, labor strikes, or production problems, can severely disrupt the supply chain and cause inventory shortages.
Long Lead Times
Some products may have long production lead times due to complex manufacturing processes or international shipping. If you fail to accurately forecast demand or encounter unexpected spikes in sales, you may find yourself with inadequate inventory to meet customer needs.
Sudden Changes In Demand
Supply and demand for just about any product will fluctuate. In most cases, you can anticipate trends and stock up accordingly. For example, you will already know about upcoming holidays and products that are likely to be in demand. However, some changes can be sudden, giving you insufficient time to adjust.
Low Safety Stock
Safety stock is excess inventory kept in case something changes suddenly to your supply or demand. Many smaller businesses won’t have the resources to purchase safety stock, while larger companies might have low safety stock for reasons like human error.
Regardless of the reason why, running out of stock can be bad news for companies because they’re missing out on often essential revenue. And in many cases, this would be through no fault of their own. However, you can still use backorders to help you overcome the problem.
As with any logistical approach, backorders have pros and cons that need to be weighed up before deciding to go ahead.
The Advantages of Backorders
Some of the most commonly encountered benefits of backorders include those below:
Continue Generating Revenue
Backorders let you continue bringing in revenue despite being out of stock. That can be a godsend to many businesses, particularly to small companies with limited resources.
Less Need For Storage
Because a backorder has already been purchased, you can send it to your customer as soon as it arrives. As such, your products will only take up storage space temporarily, if at all. And if you don’t have stock in storage, you also won’t have the associated overheads and other drawbacks.
Increase Demand Through Scarcity
When a potential customer sees an item is available on backorder only, it gives a sense that the product is in high demand. When people think many people are buying an item, it can compel them to buy also to not miss out.
The Disadvantages of Backorders
No logistics procedure is without its drawbacks, and backorders are no exception. Here’s a look at some of the backorder drawbacks you’re most likely to encounter:
Impatient Customers
The majority of online shoppers want to receive the product as quickly as possible and are unwilling to wait for the product to become available. As such, many will choose to buy from a competitor than wait, causing you to lose out on the sale and a potential long-term customer.
In fact, up to 43% of consumers will go to another store instead, making it a good idea for many businesses to retain sufficient stock.
Brand Image Risk
Frequently having products available on back-order poses risks to your brand image, potentially hurting your bottom line. For example, frequent back-orders can give the impression that your company is experiencing financial difficulties, which would turn many potential customers away.
Businesses that use back orders as a business model risk devaluing their brands, overall.
How To Avoid Backorders
While backorders have their advantages, most companies prefer to avoid them in the first place. The good news is you can take steps to help ensure backorders don’t happen to you.
Here are a couple of ways you can prevent the need to use backorders.
Go Digital
If you haven’t already, you should invest in the software and hardware that helps you manage your business effectively. You will find a wide range of logistics and business software online, that comes with a range of useful inventory management tools. And not only will such platforms help reduce human error, but they can also help save time that can be spent on other important tasks.
Invest In More Stock
Investing in more safety stock will help ensure you have the bandwidth to accommodate changes that would otherwise result in running out. However, this approach has drawbacks such as potential financial loss and higher overheads for storage, etc.
Use Multiple Suppliers
If you put your faith in one supplier, then you are putting your faith in their ability to always be reliable. And even the best suppliers can experience issues, and if your only source comes from them then you are likely to experience stock problems. Instead, it’s best to not put all your eggs in your basket and source multiple reliable suppliers.
Summary
Backorders are an often necessary way for businesses to continue generating revenue despite having temporary inventory issues. The solution can be a godsend for many businesses, particularly smaller companies with limited resources.Regardless, if you want to learn more about backorder and what you can do about them, feel free to get in touch with the team at SFI. Our friendly and experienced professionals will be happy to help however they can.