“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:
- What back orders are (and how they differ from stockouts)
- How back orders impact customer satisfaction, retention, and overall revenue
- Specific tactics for mitigating back orders (and the issues that cause them)
Let’s dive right in.
Introduction to back orders: understanding what they are and why they happen
What are back orders?
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.
What’s the difference between back orders and stockouts?
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.
How do back orders occur?
Back orders don’t just appear out of nowhere but are often symptoms of more significant inventory management deficiencies.
- Inaccurate inventory tracking: Poorly managed inventory data can lead to inaccurate figures that cause businesses to mistakenly think they have the product in stock when they don’t.
- Unexpected demand surges: Unexpected spikes in customer demand (such as seasonal increases) can deplete inventory faster than expected, resulting in back orders.
- Supply chain delays: Problems with suppliers can cause unanticipated delays that result in back orders.
- Misplaced priority: Focusing too much on short-term sales goals (instead of long-term customer satisfaction) can cause inadequate inventory levels.
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.
The importance of inventory management in preventing 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:
Develop an accurate inventory tracking system
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.
Analyze customer buying trends
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.
Regularly review inventory levels
Perform periodic checks to make sure your inventory levels are where they should be.
How supply chain issues can lead to back orders
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.
Understanding the link between the supply chain and 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.
Factoring in lead time demand and multiple suppliers
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.
Maintaining safety stock levels to minimize back orders
Before we dive into the nitty-gritty of safety stock, there’s a larger concept all ecommerce business leaders must understand first: inventory turnover.
What is inventory turnover? And how does it relate to back orders?
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.
How to calculate the right safety stock to mitigate back orders (and avoid excess stock)
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.
Maintaining the right balance: tips for adjusting safety stock levels
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.
Understanding reorder points: another key to managing back orders
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.
How reorder points work and why they’re important
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.
How reorder points and lead time demand inform one another
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.
Preparing your stock levels for unusual demand spikes
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.
How to manage back order fulfillment in your online store
Strategies for minimizing back orders and retaining customers
Here are some actionable strategies you can implement to minimize back orders and keep customers from running to the competition.
- Monitor your inventory levels and sales data regularly to identify any potential back order situations
- Implement an efficient order fulfillment process to ensure that back orders are managed and shipped promptly
- Use inventory management software to automate and optimize your stock levels and reorder points
- Communicate with your suppliers to ensure that they can consistently provide the products you need, when you need them
- Offer alternative products or options to customers in the event of a back order, such as rainchecks or similar items
- Be transparent with your customers about your inventory levels and any potential back order situations, and provide regular updates
- Consider using safety stock levels to ensure that you always have a safety cushion of inventory available
- Encourage customers to place pre-orders for popular items to minimize the risk of stockouts and back orders
Avoid back orders by staying on top of customer demand
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.
How to anticipate and meet customer demand
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.
The benefits of using inventory management software to manage back orders
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).
How an inventory management system can streamline back order management and increase customer satisfaction
Let’s look at some of the specific ways an inventory management system like Linnworks can help you streamline back order management.
Automated stock reordering
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.
Real-time inventory tracking
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.
Centralized order management
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.