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"We're sorry, it's currently on back order."
Chances are, you've been on the receiving end of this phrase, and it was probably the cause of a lot of disappointment.
Back orders can be a major issue for any ecommerce business, as they can result in dissatisfied customers, lost sales, and decreased profits.
But even in airtight ecommerce organizations, back orders are inevitable. Therefore, it's a critical skill for all ecommerce business leaders to understand how to manage them well.
In this blog post, you'll learn:
Let's dive right in.
Back orders occur when a customer orders a product that isn't currently in stock. The product will eventually be shipped to the customer, but it might take longer than usual due to supply chain issues.
The terms "back order" and "stockout" are often used interchangeably, but they actually have different meanings.
A stockout occurs when a business has completely run out of a particular product and is unable to fulfill customer demand. This means that customers who place an order for that item will not receive it until the business is able to restock.
On the other hand, a back order happens when a customer places an order for a product that is temporarily out of stock, but the business is still able to fulfill the order once it receives the item from its supplier.
In this case, the customer may have to wait a little longer to receive the product, but they will receive it eventually.
In summary, stockouts indicate a complete lack of availability, while back orders indicate temporary unavailability with the potential for fulfillment at a later time.
Back orders don't just appear out of nowhere but are often symptoms of more significant inventory management deficiencies.
These issues can lead to unexpected back orders that create an unpleasant customer experience and reduce your revenue.
Don't worry. Later in this post, we'll discuss specific ways to fix these issues and mitigate back orders.
As mentioned above, back orders almost always flow downstream from poor inventory management practices.
Therefore, taking the time to develop and maintain an inventory management strategy can solve your back order issues at the source.
The full breadth of inventory management best practices goes beyond the scope of this particular post, but here are some key points in summary:
This includes keeping detailed records of the number of products in stock and the location in which they’re stored.
We highly recommend utilizing software for this, as static or manual systems require continual maintenance and are often unreliable.
Take time to study your customers’ purchase habits so you can anticipate future demand.
Put systems in place to keep track of product expiration dates, returns, and other key information.
Perform periodic checks to make sure your inventory levels are where they should be.
Supply chain management is a subset of inventory management that often involves factors outside of your control, such as third-party fulfillment services, suppliers, distributors, and manufacturers.
You may be doing everything right in your warehouse, but if you don't have control or understanding of your supply chain, you can still struggle with persistent back orders.
The link between the supply chain and back orders is an important one that must be addressed to reduce delays and improve customer satisfaction.
If any part of the supply chain experiences delays or disruptions, it can cause a domino effect that leads to back orders. For example, if a supplier fails to deliver on time, then the business will be unable to fulfill customer orders.
The key to preventing this is having visibility into all parts of the supply chain and quickly responding to any potential issues.
This requires regularly checking in with suppliers, as well as maintaining clear communication channels so that any delays or disruptions can be addressed quickly and efficiently.
Supply chain management gets exponentially more complex when you start adding multiple suppliers, each with its own lead time demand.
If you need a refresher, lead time demand is the amount of time required to process an order from the point it’s placed, until the product is shipped and delivered.
Problems can occur if you don’t factor in lead time demand for each supplier, or if there are any discrepancies between your supply chain records and reality (i.e., a supplier has changed its lead time demand without your knowledge).
The solution here is to ensure you have a comprehensive inventory management system that tracks the lead time for each supplier, and keep this information up-to-date. This will help you make sure you don’t fall behind on orders and experience any back order issues.
Before we dive into the nitty-gritty of safety stock, there's a larger concept all ecommerce business leaders must understand first: inventory turnover.
Inventory turnover is a metric that measures how quickly a business sells and replaces its inventory.
A higher turnover rate means that the business is able to sell and replenish its stock faster, which can help reduce back orders due to out-of-stock items.
To calculate your inventory turnover: Divide the cost of goods sold (COGS) by the average inventory value over a certain period of time.
This helps you calculate how many times, on average, you replenish your stock throughout the year.
Now that we have a better understanding of the concept of inventory turnover, let's talk about how it can affect back orders.
The faster your business is able to replenish its stock and keep up with customer demand, the lower your risk of back orders.
Inventory turnover can also help you track and measure customer demand more accurately, which will enable you to plan ahead and anticipate supply chain issues before they occur. This helps reduce back order occurrences and increase customer satisfaction.
Finally, inventory turnover can help you identify any inefficient processes within your supply chain that are leading to back orders and adjust them accordingly.
Now, back to safety stock. If you need a refresher, safety stock is a predetermined quantity of inventory that you keep on hand to guard against unexpected spikes in customer demand and stockouts.
The right safety stock can act as a buffer to protect your business from back orders, but it's important not to have too much stock or you may end up with excess inventory.
Fortunately, there are several methods that can help you calculate the right safety stock.
The first is called the Reorder Point Method, which involves setting a reorder point for each item in your inventory. This helps you determine when it's time to replenish stock before any back orders occur.
You can also use the Average Demand Method to determine how much safety stock you need. This method takes into account the average customer demand for a product over a certain period of time and the lead time it takes to restock inventory.
Finally, there's the Economic Order Quantity (EOQ) model, which helps you determine how much stock you need to order at one time in order to minimize costs.
These methods can help you determine the right safety stock levels to ensure that your business is adequately prepared for unexpected spikes in customer demand and minimize back orders.
While the methods above can help you determine the right safety stock levels, it's important to remember that these numbers are not set in stone.
You should be regularly adjusting and re-evaluating your safety stock levels as customer demand changes.
It's also important to use data and analytics when making decisions about your inventory. Utilize historical customer data and other metrics, such as average sales per day or weekly trends, to better understand the current state of your inventory.
You should also consider working with third-party logistics providers or leveraging new technologies, such as AI or predictive analytics tools.
These can help you optimize your supply chain and adjust safety stock levels accordingly.
We briefly mentioned reorder points in the previous section, but let's explore a bit more about what they are and how they relate to back order mitigation.
Reorder points are a critical component of inventory management. They determine the moment when a business should reorder stock to avoid running out of products.
By considering factors such as lead time, safety stock, and sales trends, businesses can set reorder points that help to optimize inventory levels and minimize the risk of stock-outs.
This helps to ensure that products are always in stock and available for customers to purchase, which can improve customer satisfaction and increase sales.
Remember lead time demand from earlier in the post? That's the time it takes for an item to arrive after a purchase order has been placed.
Reorder points and lead time demand are very closely related.
By considering both reorder points and lead time demand, ecommerce businesses can ensure they have the right amount of inventory on hand to meet customer demand.
When reorder points are set too low, there may not be enough inventory to meet customer demand, leading to stockouts and back orders.
On the other hand, if reorder points are set too high, there may be an excess of inventory, which is costly and inefficient.
By considering both reorder points and lead time demand, ecommerce businesses can achieve the right balance and minimize the occurrence of back orders.
In addition to considering the typical customer demand and lead time when setting reorder points, businesses must also be prepared for unexpected spikes in customer demand.
These can occur during peak shopping seasons or due to popular releases of products. In order to prepare for these spikes, businesses should consider increasing their safety stock levels to ensure they have enough inventory on hand to meet customer demand.
It's also important for businesses to anticipate any potential supply chain disruptions and plan accordingly. This could include increasing lead times or even considering alternate suppliers in case of disruption.
Here are some actionable strategies you can implement to minimize back orders and keep customers from running to the competition.
Backorders occur most often when we don't understand future customer demand.
Unfortunately, we don't have a crystal ball that tells us which products to order, how much to order, and how many customers will purchase.
Otherwise, there'd be no back orders at all. So, we have to do our best with estimates.
One of the best ways to mitigate back orders is to accurately predict customer demand, which is often done through sales channel analysis and historical data.
By closely monitoring sales data on a regular basis, businesses can identify trends and anticipate customer demand.
Businesses can also use market research to get an understanding of what their customers want and need. This could include surveys, focus groups, interviews with industry experts, or reviewing competitors' products and pricing.
Finally, by understanding lead times and regularly communicating with suppliers, businesses can ensure that they know when to order new inventory and have it on hand before customer demand increases.
Implementing inventory management software is one of the best investments you can make in your eCommerce business.
The main benefit of using software is that it helps automate and streamline all inventory management tasks that would otherwise require significant manual or tedious work –– most of which is especially prone to human error.
It’s also a great tool for providing an accurate, real-time overview of your inventory levels and the status of customer orders.
This makes it easier to stay on top of back orders in a timely and efficient manner (or implement the best practices that can help you prevent them altogether).
Let's look at some of the specific ways an inventory management system like Linnworks can help you streamline back order management.
Linnworks' inventory management system enables you to set up automated reordering for items that are running low in stock, reducing the risk of stockouts and back orders.
Most inventory management systems, including Linnworks, provide real-time updates on stock levels, making it easier to track inventory across multiple sales channels, warehouses and suppliers.
Linnworks allows you to manage all of your orders in one place, regardless of where they originate, making it easier to fulfill back orders quickly and efficiently.
The system integrates with multiple sales channels, so you can manage your inventory, orders and back orders from one central location.
Linnworks provides advanced reporting and analytics tools, enabling you to see which products are selling well and which are at risk of becoming back ordered.
Whether you choose Linnworks or not, investing in some form of inventory management software that accomplishes the above tasks will help you realize massive gains in productivity, efficiency, and bottom-line revenue.
Speak to us to find out how Linnworks can connect and automate your commerce operations so you can capture every revenue opportunity.