Backorders vs. Out of Stock- Things to Know About Keeping Items Available

Virginia Miller

June 21, 2024

In this article

Backorders are the items that are presently out of stock but will be available soon. Although you can buy back-ordered items, you won't receive the orders until they are back in stock. Manufacturers plan and order these products but do not produce them. Therefore, your order will stay on the list until they are available. If any SKU is 'on backorder,' you are waiting for the unavailable stocks.

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Understanding Backorders and Their Benefits

A backorder occurs when a customer order cannot be fulfilled immediately due to an item being out of stock. The order is held open until the product becomes available again. Backorders allow retailers to efficiently manage inventory levels while providing good customer service.

Benefits of Backorders

Improved Cash Flow

With backorders, payment is collected upfront before shipping the order later. This improves cash flow to help cover operational costs or provide customer promotions.

Increased Customer Satisfaction

Updating customers on order status keeps them informed and shows their business is appreciated. This can improve satisfaction and loyalty.

Better Inventory Management

Backorders help monitor stock levels without overstocking. This prevents excess inventory while still meeting customer demand.

Using Backorders to Prevent Stockouts

Backorders reserve out-of-stock items for customers and fill orders once new stock arrives. Accurate tracking of inventory and order fulfillment timelines enables planning for potential stockouts before they happen.

For limited products, procedures should manage high demand that exceeds availability. Retailers can allocate stock based on past purchase history and notify customers of availability via email/text to encourage return business.

Why Items Become Backordered

Overselling Products

Overestimated inventory numbers lead to insufficient stock for customer demand.

Warehouse Shortages

Shipping delays can cause warehouse/retail shortages until new vendor supplies arrive.

Product Recalls

Recalls due to safety issues force items out of stock until further notice.

Supply Chain Disruptions

Sourcing and production issues can contribute to store stock shortages.

Backorders vs. Out of Stock

Order Timeframes

Out of Stock timeframes are indefinite. Backorders estimate when items will become available again.

Sales Impact

Out of Stock loses sales. Backorders allow continued selling with no revenue loss.

Order Tracking

Out of Stock has no tracking ability. Backorders can be monitored for status changes.

Customer Acceptance

Commodity products won’t wait, but unique/niche items can utilize backorders without customer issue. Supply chain disruptions have made customers more accepting of delays.

Pros and Cons of Backorders

Pros

Gauges product demand for production runs
Opens customer communication to build loyalty
High backorders indicate expansion opportunities
Provides future market and trend insights

Cons

Risk of order cancellations
Payment processing headaches if cancelled
Increased customer service needs
Can frustrate customers expecting fast fulfillment

Avoiding Backorders

Strategies to avoid backorders include:

Forecasting tools to predict demand
Building supplier relationships
Frequent customer communication
Offering alternative product options
Discounts to incentive waiting

The Advantages of Selling Backordered Items

Positive aspects of taking preorders/backorders include:

Strengthening customer service
Gaining market and trend insights
Increasing sales revenue
Improving cash flow stability

Prepayment also benefits cash flow for production and distribution.

Conclusion

Backorders can be a headache for businesses but there are ways to avoid them. By using forecasting tools, building relationships with suppliers, and improving communication with customers, you can prevent backorders and keep your business running smoothly. Backorders can also provide valuable insights into customer trends and offer opportunities for increased sales. If you handle backorders effectively, they can be a positive force for your business.

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Next article: Popular Amazon Inventory Management Tools You Can Use For eCommerce Business

FAQs

What are the main benefits of accepting backorders?

The main benefits are: - Improved cash flow since payment is collected before shipping - Increased customer satisfaction by keeping shoppers updated and holding items - Better inventory management without excess stock building up - Gain insight into product demand to inform future production runs

How can I avoid frustrating customers with long backorder waits?

Be transparent about estimated shipping times. Provide order status updates through email/SMS alerts. Offer alternative products or discounts if the wait is extended. Manage expectations by communicating timelines.

Should I accept backorders if I can't guarantee when stock will be replenished?

It depends. For niche or exclusive products customers may wait. Avoid backorders for commoditized products easily bought elsewhere. Be upfront about unpredictable delays to set proper expectations.

What backorder cut-off threshold should I set before canceling orders?

There's no one-size-fits-all. Set a cut-off based on your acceptable lead time and production capacity. 30-60 days is reasonable for specialty consumer goods; consider longer for custom/hand-made items.

How can backorders improve cash flow for my business?

Collecting payment upfront before needing to ship items lets you bank revenue ahead of incurring manufacturing costs. This helps ease cash flow gaps from order to delivery.

Should I require full or partial payment on backordered items?

Full payment reduces canceled orders once back in stock. Partial payment also works for pricier items. Make your refund/cancellation policy clear. Payment plan options can help ease customer concerns.

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