Backorders Explained: How to Manage Backorders

When shopping, customers may receive a notice that a product is on backorder, meaning that the seller currently has run out of stock, but the customer may still purchase the product. When the backordered item is back in stock, the seller will ship it to the customer. A backorder notification may occur before or after a purchase. If the delay causing the backorder occurs after the customer has purchased the product, then the seller must act quickly to communicate with their customer, or else potentially lose future sales to a competitor.

Backordered products occur due to delays within the supply chain. For example, bad weather could delay shipping transportation, a sudden trend could trigger high demand beyond the raw materials readily available, or international imports could hit roadblocks due to political upheaval. Some companies use reorder points to avoid backorders. When the inventory drops below a particular amount, it triggers the inventory management software to automatically reorder from the supplier to shorten the resupply gap between inventory turnover, thus lessening the likelihood of backorders.

The backorder process can come with additional costs to the seller and buyer, such as special shipping terms and customer service requirements. Moreover, the seller might experience loss of customer base if they do not communicate the backorder to the customer. While backorders are products that the seller foresees as being available, delays or other issues in the supply chain can cause a cancellation. This chain of events can raise backorder rates, and the return of initial payments can hinder the company cash flow and the bottom line.

Companies make purchase orders with suppliers that include the delivery of products. If a product does not arrive on schedule, this causes delays and potential backordering. If your small business is experiencing such delays, consider these steps for managing backorders:

1. 1. Quickly communicate with buyers. When you know a manufacturer is unable to ship an item, communicate the information to your customers. Update your inventory and website, and inform any salespeople to communicate to customers that the item is backordered.
2. 2. Find the inventory gap. Once the inventory management system knows there is a product delay, find the cause and the solution, whether that is ordering more materials or finding another means of shipping.
3. 3. Estimate the lead time. The lead time is the time between the initiation and completion of a product. If a step in manufacturing is causing the delay, determine your production’s lead time before you have the product ready for customer orders.
4. 4. Forecast the arrival. Once management has all the information about what causes the backorder and real-time updates from their distributor, they can forecast an estimated delivery date.

Delays in the supply chain can lead to various outcomes for buyers and sellers. Consider the following terms that describe orders suppliers cannot fill at the time of purchase:

1. 1. Backorder: When a retailer is currently out of a product in-house but continues to allow customers to purchase units, knowing there is a delay in the arrival.
2. 2. Out of stock: A buyer cannot purchase an out-of-stock product until it has been replenished.
3. 3. Discontinued inventory: Similar to out of stock goods, discontinued inventory cannot be purchased once the stock items run out. However, being discontinued, these products will not be replenished again.
4. 4. Backstock: Backstock, also known as back inventory, is unsold product remaining in storage until sold.
5. 5. Safety stock: Similar to back stock, safety stock is unsold product in possession of the seller. The difference is this is extra product ordered from the manufacturers to prevent unanticipated shortages. It is critical for inventory management to keep an eye on stock levels to ensure sellers don’t have so much excess inventory they take a large loss if demand drops.

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