Being a retailer, what do you do when you go out of stock? What do you do when there is a high demand for a product with only few units of stock in hand? What do you do when there is a sudden increase in backlogs?
If you have answers for these questions, well, you know how to have control over your inventory. But what if the demand of a particular product increases and you go out of stock? Customers will buy from your competitors and you will lose the sales due to failing to reorder the products on time.
This is the point where few suppliers choose to enable backorders feature when there is an increase in demand. This needs careful planning though to ensure the backorders can be timely fulfilled. Backordering is a process where retailers/suppliers take orders for products which are not in stock. At the end of this blog we will talk about a brand that has majorly benefitted from backordering during pre-launch.
In some scenarios businesses have to deal with backorders when inventory goes out of stock and somehow orders still get placed. So now, we are stuck with a question here, what causes backorders?
Most likely causes for backorders
- Inventory miscount at time of stock inwarding, which can be a result of human error
- System outage issue wherein the inventory doesn’t get updated at required interval which causes extra orders to come in.
- Delayed inventory sync causing out of stock orders. This is especially true when selling through multiple channels and keeping a central inventory across channels.
- Products with an expired shelf life and that information not updated in the system. This causes available inventory counts to become inflated. While actual stock in the warehouse cannot be dispatched due to expiry date having passed.
- Damaged products which cannot be further counted in inventory. Again system not kept up to date will keep reporting incorrect available inventory causing extra orders.
- Offline billing of products may not be updated in the inventory on time
- Employee theft
- Inventory misplacement inside the warehouse. So when the orders come in, warehouse staff cannot find the items in the warehousing. That will create an backorder situation.
- Increase in order velocity during the holiday season due to which the system doesn’t get updated at the required frequency.
Businesses handle backorder in two different ways,
- By keeping most of the items in stock and taking backorder for out of stock products.
- By keeping fewer products in stock and accepting backorder for maximum products.
In the second scenarios, the supplier must be able to either procure or manufacture the item in order to meet the SLAs. In both the above cases, suppliers must intimate customers of the backordered products so that they can be aware of late delivery.
But why do suppliers try to eliminate or minimize backorders? We need to look after possible cases on why do companies avoid backorders and how. What impact do backorders have on companies and how does it affect them. Below are few cases of negative impact of backorder on companies,
Impact of backorders on a brand:
- Backorders may lead to deliveries later than expected and customer dissatisfaction.
- Backordering can leave a negative impression or feedback on the company if the demands are not fulfilled at a given time by the supplier.
- If products are not shipped on time or on a given date, the company may, as a result, lose their customers to rival suppliers.
- Backordering products can result in increased cost for storage space, picking, packing and shipping of backordered products.
- Companies have to bear high freight charges for hustle deliveries.
- A customer might return the backordered products once delivered due to having bought from another source, here suppliers will have to bear the delivery charges resulting in loss on backordered product.
So how brands can avoid backorders?
- Using comprehensive stock planning based on prediction of stock availability will always help in avoiding backorders. As on reaching a particular point (reorder point) of product count in Inventory, more stocks can be ordered beforehand.
- Being a manufacturer, having raw materials ready to produce more products on time is always great. With an increase in demand, they get to know at what rate the products will need to be manufactured.
- Having backup suppliers helps to cater to your customers all the time. On receiving higher than expected demand for the product, one always has a choice to contact the backup supplier.
- Reviewing inventory at a regular interval will help companies to avoid stocking up the slow moving products and making space for products with high demand.
- Lastly the warehouse must have a regular practice to follow standard techniques to avoid inventory shrinkage
Tackling backorders without losing face
No matter how much precautions we take, Newton's law always applies. There will be cases where a brand will get some backorders. In the following sections, we discuss few strategies on what to do when that happens.
Maintaining good relation with the supplier
There are customers who keep on calling or emailing the support team to get an update on their backordered items. Considering this case, businesses having good contact with the manufacturer or suppliers can enquire and plan on making the delivery faster, allowing companies to fulfill their customers demand before a given time.
Maintaining reorder point in the inventory
Analyzing the products demand and setting a reorder point in inventory will help suppliers be ready with the products to be delivered on backorder.
Maintaining a safety stock in inventory
During seasons, businesses can maintain a safety stock in order to be prepared for rising demands. Collectively, products can be backordered by the company reaching reorder level.
Effective communication with customers
After receiving a backorder, notify customers through a phone call and email about the product delivery timely updates. Few companies also apply a practice of informing customers about the similar product in stock and enquire on the requirement.
Bulk buys to minimize extra charges
Few companies wait to analyze products on demand and review the backorders they have received. On adding additional products and reaching a level at which they will be eligible for bulk discounts the order is placed to their suppliers.
There is a silver lining to the backorder. Let's talk about how companies can apply backordering practice to their benefit.
Using backorders to own benefit:
- Allowing customers to preorder the products
Before the launch of any products, after applying a successful marketing strategy, brands build up their scheme to preorder which is a great deal in driving more revenue.
E.g.: Before the launch of mobile or electronic devices, companies accept pre-orders based on which the products are being manufactured and delivered to the audience.
- Applying Seasonal Planning strategy
Backordering the products beforehand, knowing there would be an increase in demand from customers during the new season. For example, backordering winter clothing from manufacturing companies three months prior to the customers demand based on predictive analysis will help businesses in the long run.
As we have come across both positive and negative effect of backordering, let us now see how big brands deal with backorders.
How Backorders can be handled for Shopify / Magento & WooCommerce:
Brands running their sites on popular platforms such as Shopify, Magento, WooCommerce etc will run into the requirements of managing backorders just in case they get any. Below we talk about how to manage them using an advance inventory management solution.
Taking the example of an Omni-channel inventory management platform, EasyEcom which is used by growing brands to manage their inventory on eCommerce sites across platforms. Let's see below how solutions like EasyEcom can make backorder management easy.
When Backorder is received through Magento/Shopify/WooCommerce etc, EasyEcom reflects those orders in failed orders. We get options to create purchase orders based on the backorders and procure these items from the vendors. As the items arrive in the warehouse, GRN will be created to indicate inventory receipt which will, in turn, make the inventory available. Immediately available inventory gets associated with the backorders and the warehouse is now able to process the backorders.
Find the screenshots attached for reference.
After the purchase order is approved and GRN is processed, the order is successfully queued in the inventory and the order gets ready to be confirmed.
Using an advanced warehouse management solution like EasyEcom will not help in avoid backorders, it can also provide a systematic treatment to manage backorders just in case.
Now, let’s talk about how a major brand that used backorders (or pre-orders) to create a pull effect for their products.
How OnePlus used backorders / pre-orders to generate demand:
One plus is one such brand that has applied these backordering practices and has majorly benefitted from their planning. Its distinct identity and exceptional performance has made the brand a preferred choice for consumers looking for a reliable and exceptional smartphone experience without having to shell out too much money. Being a Chinese Smartphone brand that began in 2013 it has managed to become one of the biggest Android phone company. In terms of overall ranking, Oneplus grew 120% year on year during Q3 2017 and debuted at number 8 in the list of top 10 brands globally and has almost doubled its market share in the premium smartphone segment. Globally, it has become a 1.4 billion dollar brand in the fourth year of its operation with India as its biggest market. The success of this startup stemmed from the fact that it was graciously accepted in Europe - an evolved, tech and operation driven market.
As per Gadgets360, they have shown a growth in the Smartphone segment by capturing 48% market share in India with a 97% of year on year growth.