What is backordering? Backordering is the process of selling inventory you don't have on hand. We'd like to introduce you to that handy little trick.
Imagine you’re selling. In fact, imagine you’re selling a lot; your product is flying off the shelves so quickly that you can’t keep up with the demand. So what do you do? Stop selling? Disappoint customers, lose sales and drive them into the arms of a competitor? No way. To prevent that from happening, you can use backordering.
A backorder allows your customers to shop your products even when you don’t have sufficient stock on hand. Sounds tricky? It isn’t. In fact, it’s really common in retail.
Ultimately, backordering boils down to having orders that you can’t fulfill or more orders than you have stock on hand. It’s a dream for any business but it’s also a huge problem if you don’t know how to handle it. Just look at Apple. Every iPhone they’ve ever released triggered a demand so great it resulted in backorders, and people were willing to wait. But Apple has an amazing track record for getting those orders to their customers on-time. Let’s see how you can do the same.
Let’s take a look at the logistics problem: When you get a sales order, there might be one or several items that are out of stock. If there’s just one out of stock item, it’s easy. Just create a new purchase order for that one item, and inform the customer when the backordered item will arrive. However, imagine that you have to manage tens or even hundreds of different sales orders a day. This is where it gets hectic. An out of stock item could be spread across several sales orders meaning that you must consolidate all out of stock items from different sales orders into one purchase order. Or even worse, you might have several out of stock items from different suppliers - this gets hectic.
As a retailer the logistics for dealing with backorders is a test of endurance in itself. Let’s look at what fulfilling backorders entails:
1. Recording all your sales orders with items on backorder
2. Place a purchase order for these backordered items with your supplier
3. Once it arrives, search through your sales orders to match these to the correct purchase order
So basically you’ll be doing this... in a less visual way:
If you have too many backorders and are running into this operational problem of consolidating purchase orders and fulfilling those backorders, spreadsheets won’t help you. You might want to consider an inventory management system at this stage that can automatically manage any backorders you have.
Demand’s off the charts, and your products have sold out! You’ve emptied out your warehouse and there’s no more safety stock to fall back on. So now you’ve got two choices: Disappoint your customers and tell them that you’re out of stock, or open a backorder. The bottom line is all about managing customer expectations regardless if you’re a small accessories & apparel store or if you’re big-item seller such as furniture store. The general rule we like to use is, the bigger the item value (physically and monetarily), the more “delivery tolerance” you get from your customer.
As a small retailer, it may not be feasible to purchase more stock and risk overstocking.. If you have the right analytics in place, you can probably predict how an item will sell, but that’s if you are running a cloud inventory management system. Even then, it’s possible that unexpected demand surges can happen, and you’ll go out of stock. While making a sale is tempting, the reality is you might get caught selling out of stock inventory and customers will get disappointed if they are not informed that their items might take longer to deliver.
One suggestion to keep selling AND keep customers happy is to create a new sales page where you can list all backorders. Having a separate backorder page dedicated to items on backorder not only allows you to sell stock not on hand, but informs your customers that the items they are about to purchase may take longer than usual to deliver.
Running your business with backorders and a reliable supplier works. You’ll save a ton on carrying costs -- no added storage and service costs needed to store inventory. You begin with taking backorders on the products displayed on your website and once enough you’ve got enough orders to hit the quota, it’s time to place an order with your supplier. It also lets you offer a huge variety of products at a lower cost as you won’t have to cover carrying costs. If you dropship your backorders, your customers won’t even have to wait for their backorders to reach you. Your supplier will fulfill these for you, further cutting down your customers’ waiting time.
Think about the types of items you sell. Imagine you’re selling hand-carved Chinese-made furniture. Furniture usually consists of big and bulky items so the holding costs for these tend to be very high. Instead of incurring hefty carrying costs, you can inform customers that delivery time on items may vary for all products, while keeping a small quantity of the most popular for immediate sale. Customers don’t need to know your business runs on backorders as long as you establish that items will take a while to arrive. Most customers are accepting, especially when dealing with big-ticket items.
If this sounds like preordering to you, you’re not wrong. But do take note: preorders are advance purchases of the product that will only be shipped out on the release date, while backorders will be fulfilled as soon as possible without needing to conform to a set release dates.
Opening a backorder means increased sales and anxious customers. After all, you’re asking your customers to pay for a product in advance, so naturally they’ll be worried. They’ll be asking for constant updates, and customers are unforgiving when it comes to lack of communication.
If you promise them you’ll start shipping on the 28th of January, every customer with their products on backorder will be expecting to receive shipping notifications on that date. Date slippage and lack of communication are unforgivable in their eyes, so a good rule of thumb is to preempt these through keeping your customers in the loop. If there’s a delay, tell your customers before the flood of complaints begin. Send an email, apologize, provide a new estimated time of arrival, and you’ll save yourself from irate customers.
With a reliable inventory tracking system, you can easily manage backorders to make sure your customers aren’t left waiting long.
Read next: Inventory management for Small Businesses