"I want it now!" Veruca Salt yelled at Willy Wonka before falling down a chute for being a bad egg.
Though intended as an important lesson for children, you can understand her impatience if you've ever run into customers who purchase backordered items. They place an order and are excited for its impending arrival only to discover that it won't be coming any time soon. They might be surprised to learn that backordering is as important and intentional a part of inventory management as physical counts of inventory and ABC inventory analysis.
So, what is backordering and what are the benefits to it? We'll run you through the basics of backordering and its effects on inventory management, the supply chain, and customers so your order management specialist can stay on top of things.
Backorder Meaning: What Is Backorder?
Backorder means an order for a good, material, or service that cannot be filled due to a lack of supply. Backorders are a very common occurrence in the world of inventory management techniques. Backordered goods are not on-hand at the time of sale, but are expected to arrive at some point in the future. This sets them apart from discontinued inventory and just in time inventory.
Backorder Definition Supply Chain
Within the supply chain, a backorder is a good that is not readily available, but expected to continue passing through the chain at a given date. Backordered items can slow down the entire supply chain depending on where the issue is. This effect becomes more pronounced the further from the problem one gets. The part of a supply chain most impacted by backorders is the business-to-customer portion as they are the last to touch the product.
How to Define Backorder within Inventory Management
Within inventory management, backorder can be defined as inventory that has been sold but has not yet arrived in your inventory. This gap between what you have as merchandise inventory, work in process inventory, and raw materials inventory and your sales leads to backorders. Managing backordered inventory requires getting an estimated arrival date from your suppliers and keeping your customers informed. Once the product does arrive, you can immediately send it on to the final destination.
Backorder or Back Order?
Both backorder and back order are acceptable forms of the term and are used in inventory management. Dictionaries like Merriam-Webster generally argue that it's two words, but both are used often. Use whichever version works for you. There is also the term back-order, which is the verb form meaning to assign a product as backordered.
Other Ways to Refer to Backorder
There are many ways commonly used to refer to backorders, though some terms do not have exactly the same in meaning. The most used terms include out of stock, depleted, non-stocked, or awaiting shipment. Most consumers understand these terms to mean that their order was accepted, but will not ship for a given amount of time.
What Is Back Stock?
Back stock is unsold stock remaining in storage. Though the term seems like it would be synonymous with back order, it is very different. Back stock is more akin to safety stock and sits in inventory until a customer purchases it.
Back inventory is synonymous with back stock and refers to inventory that sits in the warehouse waiting to be sold. Most businesses that run on a normal inventory model will have some amount of back inventory. If you have too much back inventory, it's probably time to look at inventory reduction.
How Long Does Backorder Take?
Backorder length depends on many factors including demand, supply, cycle inventory or manufacturing inventory problems, and bulk shipping issues. This means backorders could be processed anywhere between a week from ordering and a few months.
A partial backorder occurs when only part of an order is not in stock. Think of a kitting process that has one of its components missing. These orders can be handled in two ways. The in-stock items are shipped immediately and the backordered items are sent once they come off backorder. Or, the in-stock items are held until the backordered items are ready, and they all ship together.
What Does Out of Stock Mean in Terms of Time?
Out of stock is not interchangeable with the term backorder as it does not have a set timeframe for resupply. An item that is out of stock could be suffering from production issues, be lost in transit, or there simply could not be enough to meet demand. Only the manufacturer and shipper would be able to provide a time frame for out of stock items. Once a time frame is established, that item is considered on backorder.
Inventory Benefits of Backordered Items
Though mistakenly viewed by some as a negative thing, backordered items actually have many benefits to a business and are often part of a larger business plan. These items can help a business grow their sales and satisfy customer needs.
Here are a few reasons a business will use backordering:
- Product value goes up. This is pretty basic economics, when demand is high and supply can't keep up, the value of that supply increases. Real or perceived scarcity increases the value of remaining stock, which in turn leads to higher prices.
- Cuts costs. If your customer base is strong enough to support consistently backordering, you can save a lot of money on storage costs. That's because these items will immediately be shipped or sold and avoid sitting in warehousing.
- It doesn't hurt your customers. Your customers don't really suffer from backordered goods. If a good is entirely discontinued, you may lose a customer to a competitor. If it's backordered you may be their preferred business to order it with.
- Gives insight into customer patterns. Product sales, demand cycles, and customer needs can be discovered from backordered goods. You can use the data you collect selling wholesale through an online marketplace to make informed decisions and increase revenue.
How to Avoid Backorders
Sometimes backordering isn’t done intentionally, but is a result of improper planning. If your business is running into issues with backordering and it’s having a negative impact on your sales and your inventory turnover ratio, there are a few ways you can try to avoid the issue.
Demand forecasting is using your historical data and trends to predict future sales and demand. A business with adequate data regarding their sales and inventory trends can see patterns emerge that will allow them to order inventory at appropriate levels. This can easily be done by using inventory management software. You should also plan for how many inventory days you expect product to sit in storage and if your supplier requires an MOQ (what does MOQ mean?).
Adequate Safety Stock
Safety stock is inventory that is purchased specifically as a buffer in the event that demand suddenly increases. This stock sits in storage and is accessed when the normal inventory sells out. This ensures that your customers can always purchase the items you offer for sale without having to wait. Having a dedicated order management specialist on staff to conduct a regular inventory audit is a great way to ensure stock levels are routinely monitored.
Back That Order Up
In the modern, fast-paced world, it is highly unlikely that you will never run into issues with backordering. This can be a positive or negative thing depending on your role in the supply chain and your ability to satisfy customer needs. When done right, backordering can help you grow your business and increase sales.
If you don't want to run into issues with backordering, you could try using dropshipping as an inventory method. In this way, your supplier is responsible for shipping directly to the consumer, so any issues with orders falls on them. Vendor managed inventory, custom subscription boxes, and consignment inventory are other choices and involve the creation of a very strong working relationship between you and those in other parts of the supply chain.
Frequently Asked Questions About Backorder
Backordering is anything but fun. When you’re aware of what causes it and how to respond, it will happen less often. Read these commonly asked questions and our answers to prepare yourself:
What causes backorder?
A backorder happens when a business receives an order that they’re unable to fulfill right away. The business then needs to order or manufacture the requested product to fulfill customer demand.
How do you calculate backorder?
You can find backorder rate by dividing the number of orders you couldn’t fulfill by your total number of orders, and then multiply by 100. This gives you your backorder rate as a percentage.
For example, if you couldn't fulfill 14 orders out of a total of 250 orders, your backorder rate would be 5.6%.
What is the total backorder cost?
The backorder cost is all fees and expenses incurred when a company needs to backorder a product. Due to broad variability in backorder frequency, product type, and how well a company manages their inventory, it’s impossible to predict backorder cost for any company.
A backorder happens when a business is unable to fulfill customer orders with their current amount of inventory. Backordering can be expensive, because you have to replenish stock but also receive it sooner. Backorders and lead time are often mutually exclusive, as the nature of a backorder means you’re trying to get shipments in as soon as possible.