Backorders: What They Are and How to Manage Them Effectively

Mismanaged inventory is a frequent startup killer. Overstocking products leads to illiquidity, locking up capital in a warehouse full of items you can’t be sure you’ll ever sell. Strategic backorders balance inventory and customer expectations, saving money and time while freeing up storage space.

So, what is a backorder in supply chain work? In this guide, we’ll dive deep into the pros and cons of backordering and help you understand how to wield this helpful inventory management.

What is a backorder?

Backorders are integral to what inventory management is. A backorder occurs when retailers sell a product to customers that’s currently out of stock. Consumers can make the purchase and hold their place in line, figuratively speaking.

When the product comes back into stock, the retailer may contact the customer to pick up their order, or — when ordering online through Amazon or another e-commerce site — the backordered item may be delivered automatically.

Backorders are a popular way for stores to continue selling in-demand products despite a hiccup in their supply chain.

3 key factors affecting backorders

So, what causes an item to run low and eventually hit backordered status? And what factors could affect your ability to follow through on delivering backordered products? Knowing the answers to these questions can help small businesses and large enterprises alike minimize glitches and streamline inventory.

Here are three common reasons a product will go on backorder:

• Incorrect sales predictions: Inventory management is a mix of guesswork and data-backed decision-making. You can predict how much an item will sell based on past sales numbers, but an unexpected rise in consumer demand will cause a product to fly off the shelves.
• Inaccurate tracking and data analysis: If you take inventory and place orders manually, problems may arise. One tiny error can spark inventory shortages and other errors that a top-of-the-line inventory management system would have caught and rectified early on.
• Supply chain woes: Even if you place orders on time and accurately predict the amount of stock you need to meet customer demand, disruptions elsewhere in the supply chain could affect your inventory. From trucker strikes to problems at the manufacturing plant and clerical issues on international shipments, many situations could spell trouble. Unfortunately, they’re out of your control.

Backorder versus out of stock: What’s the difference?

“Backordered” and “out of stock” are sometimes used interchangeably, but they refer to different situations.

• Out-of-stock products are unavailable either at the store level or company-wide. When a retailer lists a product as out of stock, they typically don’t know when it will be available again. In some cases, the item may be discontinued entirely. Retailers rarely sell out-of-stock products because they can’t guarantee — let alone predict — delivery.
• Backordered products are technically out of stock, but there's an expected date when they will be back on shelves or in the company’s warehouse. Often, a backordered product is simply delayed; either the delivery is running late, or the store experienced higher-than-anticipated sales and is struggling to keep the product in store to meet demand.

Advantages of backorders

Why should stores bother putting items on backorder rather than saying they’re out of stock and trying to sell something else? Backorders benefit retailers in several significant ways.

Increased sales

Every time a retailer tells a customer an item is out of stock, they miss out on a sale. Sure, you can ask consumers to return in a few weeks to check on inventory, but they will likely shop elsewhere instead.

On the other hand, you can continue to sell backordered items even when you don’t have them, because you know they’re on the way. You’re still generating cash flow as you would from an actual sale. Just be very sure your order is en route. Otherwise, you’ll be on the hook for a lot of refunds.

Improved customer satisfaction

Customers forced to shop at a second- or third-choice store are more likely to be disgruntled due to the time they have to invest searching for a product. Offering backorders gives customers peace of mind and saves time. They know the item they want will eventually show up, and they’re able to pre-purchase it. They can hold their place and line and possibly even secure an advantageous sale price.

Streamlined inventory management

Marking a product as backordered instead of simply out of stock helps with inventory management — as long as you’re sure the product is actually coming back. When an item goes out of stock, it’s easy to write it off, reassigning space on shelves and in the warehouse. Retailers might even remove universal product codes from their computer systems. All those changes must be reversed if the “out-of-stock” item becomes available again.

Backordered products are understood to be in a holding pattern. They’re not gone, just delayed; they get to keep their rightful place in the inventory management system.

Optimized storage space

It costs a lot of money to rent large storage spaces for tons of inventory. Incorporating backordering into your inventory management strategy lets you run with less stock and turn to backordering when you run out of items on site.

Fine-tuned inventory predictions

Backorders aren’t just reactionary. They can also help you learn more about what your customers want. If you’re consistently putting a specific product or product type on backorder, it’s safe to say you need to raise your par inventory levels so you always have more on site.

Backorder challenges

Although backorders come with numerous benefits, there are also potential problems that should be recognized and accounted for whenever possible.

• Risk of cancellation: Customers pay in advance for backordered items, but they can still cancel if the wait time exceeds expectations or if they decide to purchase a substitute elsewhere.
• Increased workload: Much of the backordering process is automated, but you still need to dedicate resources to managing pre-orders, contacting clients, and chasing down delayed freight shipments. Backorders add extra work to your team’s load, and it’s crucial to determine whether there’s adequate ROI.
• Payment issues: Although many retailers charge up front for backordered products, others opt to take payment information but only process orders once backordered items are delivered. That method becomes problematic if the lead time is protracted and payment information expires in the interim.

Frequently asked questions

How long do backorders take?

There's no industry standard or government regulation on how long a backorder can take. Sometimes, companies know their “missing” products are on the way and can give consumers an expected arrival date. Other times, it’s a guessing game, and customers must wait for a notification that the products are finally available.

Are backordered items and pre-ordered items the same thing?

Backorder versus pre-order is an important distinction. Backordered items were in stock but are temporarily unavailable while the seller awaits restocking. Pre-ordered items are put on sale for the first time before any inventory is available. Customers pre-order to reserve a unit from the first available shipment, earmarking a product before it’s available for general sale.

How do backorders work?

First, the retailer indicates that the item is on backorder. Then, customers order that product and are notified of the manufacturer’s expected delivery date. Internally, stores then take steps to pay for the backorder and make room for the impending delivery while processing the customer’s payment or issuing an invoice. Finally, the backordered item arrives, and the store either notifies customers or automatically sends the product out for delivery.

Improve your inventory management processes with Orderful

Need help dialing in your ordering process? Orderful’s cloud-based system uses modern APIs that connect business systems and trading partners, making EDI integration and everyday decision-making easier than ever before. For more information, reach out to an Orderful expert today.