What are backorders? Backorder meaning, causes, and prevention
Understanding backorders is essential to avoiding major customer service issues. With the right information and attention to detail, you can minimize the impact of backorders on your business or avoid them entirely.
What are backorders?
A backorder is an order for a product that is temporarily out of stock but still available to buy, on the promise that it will ship once your inventory is replenished. The customer can still place the order, and the sale stays in play.
Businesses use backorders when demand for a product exceeds its supply. This can happen for a variety of reasons, such as a demand surge or a manufacturing delay. Sellers can keep taking orders even when inventory is low or at zero, which protects sales that would otherwise be lost.
Managed well, backorders maintain customer satisfaction while you address an inventory shortage. Managed poorly, they become a waiting game that tests customers’ patience and sends them to a competitor. Either way, you need an efficient system for order fulfillment and inventory management so backordered items ship quickly, and better inventory forecasting and replenishment so you have fewer backorders in the first place.
What’s the difference between a backorder and a stockout?
The two situations look similar to a shopper, but they play out differently.
| Backorder | Stockout | |
|---|---|---|
| Stock on hand | None, but a replenishment order is on the way | None, and no new order has been secured from the supplier |
| Can customers buy? | Yes, and the order ships when stock arrives | No, the product can’t be purchased online |
| Effect on the sale | The sale stays in play | The sale is lost unless the customer returns later |
A backorder is like reserving a table at a popular restaurant: you may wait for a later sitting, but your spot is secure. A stockout is arriving without a reservation and finding no tables, so you try somewhere else.
6 causes of backorders
Backorders are common in supply chain management and are frequently caused by one or more of the following.
1. Demand exceeding supply
Backorders occur when demand for a product is higher than what’s in stock. A product can go viral, or a promotion can outperform expectations, and your usual stock levels can’t keep up. Keep an eye on market trends and consumer demand so you can forecast the inventory you need.
2. Inaccurate inventory records and overselling
When inventory records are wrong, it’s easy to sell products you no longer have. Manual stock updates, staff unfamiliar with out-of-stock or discontinued items, and sales channels that don’t sync with each other all lead to oversells. Regular monitoring and accurate counts across every channel are the fix.
3. Weak demand forecasting
Failing to predict demand patterns leads to shortages, especially during peak seasons and sales events. Unexpected shifts in customer behavior add to the problem, so keep monitoring the market and your customer orders to make sure your expectations stay current.
4. Supply chain delays
Unexpected delays from suppliers, manufacturers, or shipping carriers mean items don’t arrive when expected. Provide realistic shipping times and keep customers informed about any delay or change.
5. Long or unpredictable supplier lead times
If your suppliers have lengthy or unpredictable lead times, restocking turns into guesswork, and the likelihood of backorders rises.
6. Poor communication between supplier and customer
Backorders become more damaging when expectations aren’t clear. Customers need to know what to expect and when their product should arrive, and you need the same clarity from your suppliers.
Understanding the root cause of your backorders is critical to avoiding them in the future. Review backorder scenarios on a regular basis to identify issues and the steps that prevent them.
How to prevent backorders
From inventory shortages to customer dissatisfaction, the costs of backorders add up quickly. Preventing them takes more than stocking up. Overstocking ties up capital and raises holding costs, so the goal is a balance that keeps cash flow healthy and customers happy.
1. Keep inventory counts accurate across channels
When every sale is recorded accurately across all your channels, backorders become less likely. Inventory management software syncs stock levels across your platforms, so you avoid overselling and the backorders that follow. Linnworks syncs stock across your channels in under 10 minutes.
Inventory tracking gives you a live count of how many units are available, so you can spot low-stock items and reorder, or move products between locations, before a shortage reaches the customer.
Rich Tannous, Director of Operations at Tiesta Tea, describes what that looks like during a peak event:
“Linnworks effectively syncs inventory across Amazon, Walmart, and Shopify, preventing overselling and missed sales, which is a dream in high-volume events like Black Friday.”
Rich Tannous, Director of Operations, Tiesta Tea
2. Forecast demand
Demand planning software translates past sales data and demand patterns into stock forecasts, so you can prepare without running low or piling up inventory that overcrowds your warehouse.
“Stock forecasting not only saves me time but provides me with more accurate re-ordering figures.”
3. Set safety stock, reorder points, and order quantities
Three related numbers keep stock flowing. Each answers a different question.
Safety stock is a buffer that keeps operations running when demand spikes or a supplier runs late. A simple way to set it is your average daily sales multiplied by the number of days of cover you want. More precise methods account for how much your demand and lead times vary. Our guide to the safety stock formula walks through them. Raise the buffer ahead of peak seasons and promotions, using last year’s sales as a guide.
Reorder points are the stock levels that trigger a new purchase order. A reorder point is the demand you expect during your supplier’s lead time, plus your safety stock:
Reorder point = (average daily sales × lead time in days) + safety stock
For example, if you sell 20 units a day, your supplier’s lead time is 10 days, and your safety stock is 100 units, your reorder point is (20 × 10) + 100 = 300 units. Our guide to minimum stock levels covers this in more depth.
Economic order quantity (EOQ) tells you how much to order each time, balancing the cost of placing orders against the cost of holding stock. The standard formula is:
EOQ = √(2 × annual demand × cost per order ÷ annual holding cost per unit)
For example, with 12,000 units of annual demand, a cost of $50 per order, and a holding cost of $2 per unit per year, EOQ is √(2 × 12,000 × 50 ÷ 2), or about 775 units per order.
Two practices help you apply these numbers:
- Automated purchase orders. When POs are generated automatically as stock hits the reorder point, orders go out faster and with fewer manual errors, so products are ready for customers with less effort.
- Just-in-time (JIT) inventory. Just-in-time inventory management keeps stock lean because you order only what you need, when you need it. That cuts holding costs, but it leaves less buffer, so it works best with reliable suppliers and short lead times.
4. Use warehouse management to protect availability
People often use “inventory management” and “warehouse management” interchangeably, but they cover different ground. An inventory management system (IMS) focuses on tracking overall inventory levels and sales across channels. A warehouse management system (WMS) adds tools for organization, layout, storage, picking, packing, and shipping on the warehouse floor. Our guide to choosing a warehouse management system explains the difference in more detail.
Knowing what you sell on each channel isn’t enough if your sales and warehouse data aren’t in sync, because you’ll still oversell. A WMS gives you accurate SKU availability across every location, which makes backorders less likely.
If you do end up with backorders, a WMS also helps you clear them. Predefined rules can prioritize the most time-sensitive orders as soon as stock is available, and guided picking and packing speed up retrieval and improve accuracy, even at peak.
“Before, it would be impossible for pickers to be productive without learning the layout of the warehouse. But with SkuVault Core, they can come onboard and be picking on day one.”
Chris Decker, Knot Hobbies
Connecting your WMS to your customer relationship management (CRM) system also lets you keep shoppers informed about backorder status and expected ship dates.
How to manage backorders when they happen
Create backorder notifications and alerts
Keeping customers informed about delays manages their expectations and protects satisfaction. Set up notifications that confirm the backorder at checkout, give an estimated ship date, and alert the customer if that date changes.
Set appropriate backorder limits
Limit how many units you accept on backorder, so you don’t commit to more than your supplier can deliver. Limits also stop customers from getting stuck with a partial order while they wait for a single item.
Prioritize backorders
Apply rules so the oldest and most time-sensitive orders ship first when stock arrives.
Establish standardized procedures and protocols
Document how your team handles backorders, from the customer message to the pick list, so everyone involved is on the same page.
Review backorder data and trends
Regularly review backorder data to gain insight into customer satisfaction, supply chain issues, excess stock, and more. That shows you the weak links in the chain, so you can adjust and cover unusual demand.
Frequently asked questions
Backordered items can occur for a variety of reasons, including an unexpected surge in demand, inaccurate sales forecasts, supplier disruptions or production delays, and poor inventory tracking.
Follow good inventory management practices. Maintain accurate, up-to-date stock records, monitor demand for key items, and make sure your suppliers can meet anticipated demand. Consider backorder policies, such as backordering only when necessary or limiting backorders to specific quantities, and backorder management software that automates tracking and control.
Backorders can delay customer deliveries, increase costs through additional handling and shipping, reduce customer satisfaction, and lose sales if the backordered item is no longer in stock when the customer decides to buy elsewhere.
Create a backorder policy and follow it. Set realistic delivery dates, provide estimated backorder times, and tell customers when their order has been backordered, so they can make an informed decision. Prepare customer service teams to answer backorder inquiries promptly.
Dropshipping is one alternative. A supplier or manufacturer ships an item directly to the customer from its own warehouse, so you don’t hold the inventory yourself. That moves the stock risk to your supplier, though, and your customer can still face a delay if the supplier runs out. Dropshipping can also cost more per order than fulfilling from your own stock, and you have less control over fulfillment. Check any legal or tax issues in your region before you switch.
No. Used well, backorders manage inventory levels and keep sales in play, and clear updates on order status or estimated delivery dates can build trust and loyalty. Weigh the pros and cons for your business, and take steps to reduce the risks.
Create a backorder policy, give customers estimated backorder times, and keep them informed of any delays. Follow good inventory management practices, and consider an order management system that tracks orders and inventory as they change, so you can spot backorders and act before they become costly.
Give customers clear, timely updates about backordered items, including estimated delivery dates where available. Be ready to answer questions about the process and to offer alternatives. Above all, be understanding. Backorders frustrate customers, and a patient, empathetic response keeps their experience positive.
No. With a backorder, customers can buy now and receive the product later. With a stockout, the item is unavailable until it’s restocked.
Final thoughts
Backorders can be tricky and frustrating to manage, but understanding what they are, why they happen, and how to prevent them is essential for businesses that want to succeed. Review your backorder policies, work out what triggers them, and put prevention in place: accurate inventory, solid forecasting, sensible safety stock and reorder points, and a clear plan for the backorders that still happen.
Linnworks keeps inventory accurate across every channel you sell on, so you stop selling what you no longer have. See our inventory management solution or request a demo to see how it works for your business.