How to handle backorders and ensure efficient fulfillment operations

Your eCommerce store is outperforming, your stock is flying out the warehouse, and you can’t keep up. You’ve sold out. It’s a disaster – or is it?

Backorders keep online orders coming in while you wait for the stock to fulfill them. It’s a common retail tactic and is excellent for retaining customers, building hype, and outperforming your competition. But it’s risky.

A backorder can result in late delivery, unfulfilled expectations, unhappy customers, and negative reviews.

This guide explains how to successfully handle backorders, starting with what is a backorder through to how fulfillment efficiencies can prevent you from running out of stock.

What is a backorder?

A backorder is a product that is currently out of stock that customers can buy to receive when it’s back in stock. It’s almost like a pre-order – you expect a restock shortly, so you allow customers to continue ordering, ready for you to ship upon arrival.

Backorders are different from “out of stock products” because you know more stock is on its way. In contrast, an out of stock product has no replenishment date, meaning you can’t continue selling it.

The common causes of backorders

Backorders are common in eCommerce, especially for the following reasons:

  • New products that sell better than expected.
  • Peaks in demand that you didn’t predict.
  • Inefficient inventory processes that cause understocking.
  • Supplier difficulties that delay inbound shipments.

For example, at the beginning of the coronavirus pandemic, there was an unexpected demand for PPE, and suppliers struggled to ship orders quickly because of the outbreak. However, more stock was on its way, allowing sellers to put PPE products on backorder and enable customers to buy them, albeit with a longer lead time.

The advantages of backorders

Backorders can become tricky (we’ll come to that next), but there are many advantages to selling products you don’t currently hold in stock.

Customer retention

Backorders allow customers to proceed with their intended purchase instead of going to one of your competitors. If you have strong customer relationships, a generous loyalty scheme, or glowing reviews, many customers will willingly wait longer to receive their order from you.

Revenue

Backorders keep cash flowing into your business, rather than stopping sales altogether. This is good news for your cash flow and gives you extra money to meet minimum order quantities or pay for expedited deliveries from your supplier.

Product hype

A product on backorder stimulates an interesting psychological reaction, too. Studies show out of stock products create a sense of urgency, pushing shoppers to buy the next best thing – in this case, the product they want, albeit a little later than expected.

Backorders are also a form of social proof that demonstrates a product’s popularity and compels shoppers to follow the herd and buy.

An alternative business model

Some online sellers use backorders to sell expensive or customized products without carrying the financial risk of them not selling. For example, if you sold custom-crafted furniture from India, you could allow customers to backorder products before commissioning the furniture to be made.

The disadvantages of backorders

There’s a significant flipside to backorders, with disadvantages including:

Lost customers

Customers don’t generally like waiting for products, so if your product is on backorder, they’re likely to shop around. You lose the immediate sale and, depending on how good your competitors are, ongoing custom.

Slow shipping speeds

You cannot meet fast shipping speeds for items on backorder, meaning that you miss out on time-sensitive orders, and you become ineligible for fast shipping programs like Walmart 2-day delivery.

Administrative time

Backorders take time to process, record, update, and fulfill – time you could better spend elsewhere.

Extra costs

Backorders can be costly. If a customer orders other items simultaneously, you must pay to ship them separately, involving separate packaging and carrier costs. And, if you offer customers a gesture of goodwill for waiting, you pay for that too.

Late deliveries

Backorders are commonly delivered late, risking customer relationships and resulting in negative reviews. You’re reliant on suppliers restocking on-time, meaning that any delay on their end causes a late delivery for your customer.

Even if your inbound shipment arrives on time, you may still struggle to fulfill orders on time if you have a significant volume of backorders and limited in-house capacity.

How to handle backorders

If you find yourself in the sticky situation of selling out of stock that’s currently on its way, here’s how to handle backorders successfully.

1. Decide whether to offer backorders

Decide whether a sold-out product is suitable for backorder based on having:

  • An accurate estimate of when the product is coming back in stock.
  • Enough stock on the way to fulfill backorders.
  • A reliable method for recording backorders.
  • A process for fulfilling orders efficiently and at scale when stock arrives.

2. Update your listings

Make a product’s backorder status clear to anyone visiting the listing by adding a backorder status or tag and including the estimated delivery date. This prevents customers from mistakenly placing a backorder or from having unrealistic expectations on when it will arrive.

Some sellers also use a pop-up to alert customers adding a backorder to their basket.

3. Inform customers

Send an email confirmation to customers, confirming their backorder and restating the estimated delivery date.

Some customers may fall through the net and mistakenly make a backorder or not understand what is a backorder. Therefore, it’s good practice to provide customers with the option to cancel their order and join a waiting list instead.

4. Keep records

Keep accurate records of customers placing backorders, including when they ordered and the quantity ordered.

Records are important for bookkeeping purposes and inform:

  • The priority of orders to fulfill.
  • How much fulfillment capacity you need.
  • Whether you have enough incoming stock to meet demand.

Depending on the order process agreed with your supplier, you may need to raise a purchase order to cover the backorders received or to place these items on expedited delivery while you wait for a larger shipment of stock.

5. Keep everyone updated

Keep everyone updated throughout the entire process to maintain good relations and reduce incoming queries. This includes updating customers when new stock arrives and their order is shipped, and informing suppliers if you need more stock to meet demand.

It’s also essential to keep the estimated delivery date on your listings updated, accommodating the time it will take to fulfill the volume of backorders received. The more backorders you have, the longer the estimated delivery date may be.

And don’t forget to communicate any delays to customers straight away, providing them with a new estimate and the option to cancel.

6. Optimize your fulfillment operations

Ensure you have the capacity and fulfillment efficiencies to fulfill backorders upon receipt and meet your delivery estimates. This may require additional staff and warehouse space or the help of a third-party fulfillment service.

7. Thank everyone

Finally, don’t forget to thank your customers and suppliers for their patience and cooperation – you can’t do it without them.

How to ensure efficient fulfillment operations (and avoid backorders)

Efficient fulfillment operations reduce the risk of products selling out and the need to place items on backorder.

Our top five tips for ensuring efficient fulfillment operations and avoiding backorders or out of stock products are:

1. Practice demand forecasting

Demand forecasting is when you use historical data and market research to predict how well your products will sell, so you know exactly how much stock to order.

You can learn more in our guide on how demand forecasting can help grow your eCommerce business.

2. Create reorder points

A reorder point is a minimum stock quantity that triggers a re-order. The idea is that when you reach a reorder point, you still hold enough stock to meet demand until your supplier sends more products.

To create reorder points, you must practice demand forecasting, know your supplier’s lead times, and use inventory software to alert you when stock levels fall below a certain figure.

3. Inventory efficiency

Inventory efficiency is where you hold enough stock in the right places to meet demand without stretching your overheads. This is especially important for multi-channel sellers who can run out of stock on one channel, despite still holding the stock for another.

For example, let’s say you sell on Amazon and Walmart, using FBA and a fulfillment partner for Walmart. If you sell out with FBA, you can’t fulfill Amazon orders using your Walmart stock – leading to an out of stock product.

To overcome this problem and create inventory efficiency, distribute your stock with one network that can serve orders from all your channels. This way, your entire inventory is available to all of your sales channels.

4. Diversify your supply chain

A diversified supply chain is when you use multiple suppliers from different countries to reduce the risk of supply chain disruptions and delays.

If you can’t find suppliers based in different countries, look for supplies in different regions, using different shipping routes.

Learn more about supply chain diversity.

5. Work with a third-party fulfillment service

A third-party fulfillment service has the tech, tools, and expertise to help you achieve fulfillment efficiency and avoid backorders. This includes:

  • Inventory management systems that forecast demand and create reorder points.
  • Multi-channel integrations that make all stock available to all channels.
  • Capacity and warehouse locations that increase fulfillment efficiencies.

Final thoughts

Let’s be honest, backorders aren’t ideal, but they make the best out of a bad situation.

If you find yourself in that situation, use this guide to handle backorders successfully and to prevent them from happening again.

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