For business owners, backorders can be a double-edged sword. For certain products such as sneakers or smartphones, backorders may build market buzz and signal to customers that demand is high. But backorders can also signal inventory management problems or larger supply chain issues—and if fulfillment delays are too long or frequent, they can be a disadvantage.
Knowing the difference between backorders and out-of-stock items, how backorders work, and how to manage the drawbacks and advantages are key to establishing a business model that best suits your needs.
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What is a backorder?
A backorder, also known as a company’s backlog, is when a product is not currently in stock, but will be available in the future. Production delays, supply chain issues, and insufficient planning can all result in backorders. A backorder can take weeks or months to fulfill, depending on the cause and product (made-to-order items may take longer). If you run out of a product temporarily, you may offer your customers the option to accept backorders in the interim.
Typically, you take the customer’s payment details to guarantee the product’s delivery to the buyer as soon as it is available. At its core, a backorder signals to a particular business that current customer demand for a product is higher than available supply.
What causes backorders?
There are several internal and external factors that can cause backorders, including:
Supply chain issues
Even now, many supply chains are still experiencing or recovering from disruptions that originated during the COVID-19 pandemic lockdowns, and have been exacerbated by environmental factors and global conflicts. Such supply chain issues can delay production, transportation, or delivery of goods and affect your ability to fulfill orders on time.
Fluctuations in demand
Backorders may be caused by unusual demand for a particular product. Everything from a marketing campaign going viral to an extreme weather event could generate an unplanned spike in demand.
How you choose to manage inventory can influence backorders. If you keep minimal inventory or run a dropshipping business, you will likely have to manage and fulfill backorders as a tradeoff for low to zero warehouse costs. You might prefer to keep extra stock, also known as safety stock, as a way to cushion your orders from supply chain disruptions and demand shifts.
Backorder vs. out-of-stock items
Backorder and out-of-stock items are similar but distinct.
When a product is on backorder, it means the product will be available again, and is being manufactured or is in transit. When a product is out of stock, it is unavailable at the moment of sale, and the business is not accepting orders for fulfillment.
Businesses can choose to sell items that are currently out of stock via backorders or pre-orders. And as part of its marketing strategy, retailers can include information about expected delivery timelines, shipping and return policies, and customer service details like when their credit card will be charged. Taking these steps can encourage customer loyalty and help retain customers so they won’t buy from other brick-and-mortar or ecommerce businesses.
Alternatively, you may choose to hide out-of-stock items or identify them as sold out on your ecommerce website. If you do, you may choose not to post additional product details, since the items are no longer available or orderable.
Backorders: advantages and drawbacks
Understanding the benefits and risks of backorders is important when considering whether to incorporate this strategy into your business operations.
Advantages of backorders
When managed well, backorders can help maintain and even forecast sales without sacrificing demand. Backorders can allow a business to run on a leaner inventory without keeping excess stock in the warehouse, therefore reducing carrying costs. The business, in turn, can pass those savings on to customers in the form of lower prices.
Backorders can also provide a business with extra opportunities to build trust with customers by communicating regularly and accurately about backorder fulfillment. Clear and accurate communication about backorders can support customer retention.
Backorders can even build anticipation among a dedicated customer base. Take for example, clothing brand Spirit Hoods, who uses limited product runs to build demand in the market while maintaining a “just-in-time” manufacturing model. They use Facebook Live to tease new products and a Coming Soon section of their website, where shoppers can sign up to be alerted via email when a new product is available for purchase.
Drawbacks of backorders
If you accept backorders, there are potential risks. One study reports nearly 50% of customers abandon their online shopping carts when shipping times are too long or not provided. And customer expectations for next-to two-day shipping by global online retailers has set the standards for expedited delivery. Backorders can dash these expectations.
If you regularly operate with a low inventory or sell products with long or volatile supply chains, you may have a higher volume or frequency of backorders. This may hurt your ability to retain customers.
How to manage backorders
Successfully managing backorders requires diligent planning and recordkeeping, and often is critical for customer retention and loyalty. Here are some best practices to help you effectively handle the task.
Review your reorder points
If your business frequently processes and fulfills high backorder volume, you may need to retool your approach to inventory management. By reviewing and adjusting the minimum quantity of an item in stock before you reorder, or your reorder point, you may be able to minimize backorders. Plan assessments at least quarterly, and when supply chain disruptions occur.
If backorders are frequent, you may also choose to consistently stock above your reorder points to buffer against supply chain uncertainty and swings in demand.
Invest in an inventory management system
A good inventory management system can help you manage orders, track your inventory across the supply chain, analyze past performance, and forecast future sales. For example, when accepting a backorder, you mark it as a backorder in your online books. When the item replenishes, you process payment and deliver the backordered item to the customer, marking it as a completed sale in your ledger. If a customer cancels their order before it arrives, remove the sales order from the books and adjust your inventory records accordingly.
The right systems will enable you to manage inventory and complete these tasks easily and accurately. Consider software programs that seamlessly integrate with your ecommerce accounting tools and include automatic reordering features.
With Shopify POS, brands can prevent backorders from hurting sales with ship-to-customer order fulfillment. If an item isn’t available in-store, associates can close the sale on the spot, and the order will be fulfilled and shipped directly to the customer’s shipping address as soon as inventory is available.
Identify multiple suppliers
Consider identifying alternate suppliers of the same product, or a similar one, so you can provide solid customer service without significant delays. Make sure to complete your due diligence, including conducting an upfront cost analysis to compare pricing between suppliers. Be sure to evaluate supplier performance through key metrics such as on-time delivery, product quality, and level of responsiveness.
Take the guesswork out of restocks
Only Shopify helps you make smarter inventory purchasing decisions. See your most profitable and popular items, forecast demand, get low stock alerts, and create purchase orders without leaving your POS system.
How long does it take for backorders to come in?
Backorders are unique to each business and product, so there is no one-size-fits-all rule about the timing of backorder fulfillment. If you are considering accepting backorders, you may want to request historical data from your suppliers and manufacturers to assess delivery timelines.
Can backorders be avoided?
Accepting backorders is ultimately a business decision, but you can avoid them in several ways. Manage product inventory and keep higher stock levels, or safety stock, to prevent items from going out of stock. You can also choose not to offer backorders, so when a product sells out or goes out of stock, customers will no longer be able to order it from you.
What are the potential costs associated with backorders?
Potential costs associated with backorders include business accounting systems to log this specific type of sale for bookkeeping, and inventory management systems to track customer orders, inventory, and forecasting.
Can you fulfill other orders while managing a backorder?
Yes, you can continue to accept and fulfill other orders while managing backorders. In this way, backorders have upside: They allow you to conduct business on leaner inventory levels, reduce excess inventory and associated holding costs, and grow sales orders.