In this article, we will move you into the basics of back-ordering and its effects on inventory management, the supply chain, and customers so your order management specialist can stay on top of things. So, what is back-ordering and what are the benefits to it? Let's roll...
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Backorder means an order for a good, material, or service that cannot be filled due to a lack of supply. Backorders are a very usual occurrence in the world of inventory management techniques. Backordered goods are not on-hand at the time of sale but are required to arrive at some point in the future.
A backorder is created when an order can’t be fulfilled at the time of purchase because the item is not in the seller’s current inventory. However, the item is still in stock or available from the distributor.
Also known as a backlog, a backorder indicates that the need for a given product passes what the seller produced or ordered. That could be a function of poor planning, overly strict policies on safety stock or an unforeseeable stalk in demand for an item.
Avoid letting backorders on reasonable or commodity products that customers can readily purchase elsewhere. Where backorders are offered, make sure the profit margin makes the extra logistical effort worthwhile and that you can fill those requests promptly. The amount of time it takes to get a backorder item to the customer depends on several factors.
Let's look at how backorders work When a company takes orders and potentially payments for products that are not in stock, it is accepting backorders.
Once back orders are received, the inventory management system turns them to purchase orders and sends them to the appropriate internal department, vendor or distributor. Customer service teams should give buyers an assessment of when they can require their orders and how payment will be handled.
Retailers may wish to have the supplier drop-ship items direct to customers, or the retailer may take delivery of the items, change the backorders to sales orders and ship the items to customers after charging the customer’s account, if applicable.
For a confined number of SKUs at a manageable volume, this is not an overly complex process. Problems mount, however, when the number or quantity of back-ordered products multiply or when retailers have a lot of manual order processes and must meet each purchase order with a current sales order when closing the satisfaction process.
Backorders may help companies in a few ways. Retailers with confined warehouse capacity may not be able to hold a large amount of stock, but if they can assuredly track the availability of items from suppliers, they can evade congestion and acquire excess storage costs while confidently allowing backorders.
Seldom, companies see a sudden surge in demand for a product. Again, depending on visibility into the availability of additional stock, accepting backorders permits the retailer to make those sales and keep customers happy.
Small suppliers that drop craft most or all of their items often take backorders as a matter of course and place an order with the supplier only once backorders reach a certain threshold. These companies evade inventory shipping costs altogether.
The backorder process can come with extra costs to the seller and buyer, such as special transportation terms and customer service demands. Furthermore, the seller might experience a loss of customer base if they do not communicate the backorder to the customer. While backorders are products that the seller anticipates as being available, delays or other issues in the supply chain can cause a recall. This chain of events can increase backorder rates, and the return of original payments can check the company cash flow and the bottom line.
Companies produce purchase orders with suppliers that include the distribution of products. If a product does not reach schedule, this causes lags and potential back-ordering. If your small business is feeling such delays, consider these steps for managing backorders:
When you know a producer is incapable to ship an item, report the information to your customers. Update your inventory and website, and notify any sellers to communicate to customers that the item is back-ordered.
Once the inventory management system knows there is an output delay, find the reason and the clarification, whether that is ordering more supplies or getting another means of transportation.
The lead time is the time between the initiation and completion of a product. If a step in manufacturing is causing the delay, determine your production’s lead time before you have the product ready for customer orders.
Once management has all the information about what causes the backorder and real-time updates from their distributor, they can forecast the estimated shipment date.