In the past, whenever a merchant ran out of a given SKU, the company would simply issue a backorder while they purchased or manufactured more items. Customers would then wait for the item, taking the delay as a fact of life. Those days are long gone.
Today, modern warehouses are tracking both inventory levels and item velocity, making precise predictions about Low Stock and Out of Stock levels, and using that information to trigger workflows so that inventory never “runs dry.” In effect, data and planning have basically eliminated the backorder.
And that is a great thing when it comes to the customer experience.
How to Avoid Backorders and Optimize Stock Levels
So, backorders are bad, plain and simple. How do you avoid backorders and optimize your stock levels?
- Get Real-Time Data on Your Stock Levels. The first step to avoiding backorder situations is getting a system in place to accurately track inventory, in as close to real time as possible. There cannot be a whole day’s delay, between when you actually run out of items and when you discover this fact. Integrating your inventory systems with the latest scanner technology and getting real-time alerts will help you avoid stock and backorder issues.
- Get Real-Time Data on Item Velocity. It is not enough to know stock levels; you have to know how fast items are moving, too. For example, you might have less than 25% of your original inventory of an item, but if that item is moving slowly, you might not have to reorder for some time. Conversely, a fast-moving item might need to be ordered while you still have many items on hand. Thus, velocity matters more than absolute levels.
- Have the System Make Predictions. Once you know how quickly items are moving, you should be able to forecast when they will be depleted and compare this timeline against how long it takes to restock. For example, suppose it takes about three weeks to get a restock of item X from your supplier. You now know to set up a trigger in the system so that, when the inventory gets to where there is roughly a month’s volume remaining, a reorder is automatically triggered.
- Trigger Appropriate Actions. Knowing when you are going to run out is not enough. Have the alert trigger the appropriate reaction: A reorder from a vendor, or an internal work order. Build in time for put-away as well.
- Keep All Order Channels Updated. All of your order channels and shopping carts will need to be kept apprised of inventory levels. This not only signals item availability to the customer, but it can also spur them to buy now (“Only 4 remaining in stock…”). The whole process can be automated if you have the right channel integrations.
- Have a Back-Up Plan. Sometimes, even with the best of intentions and the most careful plans, you run out of inventory. There are many causes: A vendor could go bankrupt, or have its shipments tied up in customs. Shipments to your facility could be delayed due to weather. Or an item might no longer be manufactured by your usual source, forcing you to find another. For all these kinds of situations, it pays to have a backup plan—for example, using a back-in-stock alert plugin.
Why Eliminate Backorders?
Backorders have been standard operating procedure for most merchants for decades. Indeed, they are a natural outcome of having products where demand outstrips supply (either delivery from another vendor, or in-house manufacturing capabilities). When inventory ran out, the merchant would take a backorder and the customer would simply have to wait for the item to be In Stock again.
This procedure doesn’t work in today’s digital economy, however. Today’s consumer is used to a higher standard of service, brought on by the promises of Amazon.com and other large internet retailers. This higher standard includes order processing within 24 hours, prompt shipping, and speedy delivery at low cost. Needless to say, consumers with these expectations do not tolerate backorders.
Even more problematic is deciding what to do when the inventory actually comes in and it is time to fulfill those backorders. Here’s the issue: Suppose you choose to ship it to the customer. He or she might accept it—then again, he or she might not want the item(s) anymore. In this case, the customer will refuse the order, leaving you on the hook for the delivery fee (and having to issue a refund).
Things are even more complicated if a customer orders multiple items at once. Do you wait for the backordered item to come in before sending shipment? If so, you might have to deal with multiple returns by the time the customer gets the shipment. Or do you send each item as it becomes available? That’s a better solution, but it means way more in terms of shipping costs—shipping costs that you, the vendor, will have to absorb.
If you'd like to find out more about inventory tracking and optimization, feel free to reach out. In the meantime, you might be interested in how these trends are bearing out predictions that others made back in 2013!