What is backordering in materials management?
28 Jun 2021
When starting a small business, there is not that much to worry about at the very beginning. But then, with your business growing and expanding, issues and challenges increase as well. For example, in case you reach huge sales. Your product demand becomes high, and you should still meet this demand. You should also go on satisfying your customers, so as not to spoil your sales statistics. To avoid this, there is a solution: backordering. And it is essential to know what is backordering in materials management.
What is Backordering?
Backordering is used in such cases when you do not have on-hand stock. It is used primarily with a just-in-time inventory management strategy. Backordering gives your customers a chance to place orders even when there is not enough stock at hand. In the case of backordering products, products are sold faster than they are stocked. But to handle this sales technique, you should also know the tactics.
Sales increase causes demand overflow. And here, demand forecasting becomes a significant factor. As a consequence, backordering also elevates its importance. Improving your inventory management will give you a chance to establish good relationships with your customers and reduce backorders appropriately.
What is a Backorder?
Backorder is the type of service or good order which is for items not available at that particular time.
Companies can still be manufacturing the order, so here backordering materials management also becomes crucial. Backorders are usually ordered in advance but received later (as soon as it becomes available). As a rule, backorders show that product demand is higher than the supply. The exact time of getting your backorders varies depending on the quantity.
Why is Backordering Important?
Backordering mainly helps to increase your business sales. And most importantly, it is to retain your customers and not to let them go to your competitors. Backorders work best with the suitable suppliers you cooperate with. The very first step is to take backorders from the products shown on your website. After gathering a sufficient amount of orders, here is the next step. It is about ordering from the supplier. To minimize waiting time and to quicken delivery, you can use a backorder dropshipping method.
Let’s view the example of furniture. As it consists of significant items, their holding cost is high. So you inform your customers that the delivery time varies. And then you only retain a small number of popular items for immediate sale. Customers, of course, should be aware of you running with backorders. And they will take into account the fact that some products may take some time to arrive. The majority of your customers will accept those rules, especially for large and massive items. If you have such customers who face long transit times, costly shipping, cart abandonment, and out-of-stock items, you risk losing them.
Advantages of Backordering
Let’s see the benefits of backordering. They include:
- Customization: Backordering involves easily accommodated customized requests. For example, instead of a ready-made standard product, a business can offer to make a personalized item. But for this, of course, you need to be quite flexible.
- Reduced Cost: To stock large supplies, you also need to provide enough storage space. This and other business components require a lot of money. If you are a business without a storage center, you will need to pay for carrying costs. And logically, if you retain small stock, you cut your costs.
- Increased Brand and Product Value: Customers start to value your brand and products more when they know you use backordering. Various companies use this as a marketing solution. With the help of intensive backorder use, you can quickly increase your customers’ curiosity and interest in your brand and product.
- Reduced Wastes: Backordering mainly affects product wastes. For example, if you retail air conditioners every summer, there is a demand surge. Non sold items in winter could be unnecessary as new models get to replace them or they are not in their normal condition by next winter. You wouldn’t want to keep not sold items. Backordering meets summer demand with low risk.
How Backordering Works
As backordering is an order fulfilment process, first, let’s see the main steps in simple ordering products:
- The buyer places an order.
- Sales order is generated.
- Sales order is matched with the product in the inventory.
- The item is shipped to the customer.
Now let’s compare the steps with the backordered order fulfilment process:
- An order is placed for an out-of-stock product.
- Backorder is opened.
- This order is converted to a purchase order to the vendor.
- The vendor gets the purchase order.
- The vendor fulfils the order.
- You get the item and ship it to the customer.
The above information aims to highlight the importance of backordering in material management. It can become a successful business strategy no matter what order fulfilment strategy you choose. The primary purpose of backordering is to meet your customer expectations. With the use of the above mentioned practices and the right tools, you will efficiently manage all the situations and meet market demands. Just keep the appropriate balance between your convenience and the shoppers’ eagerness. Also, check out eSwap features for shipping management and order management, which can significantly assist you in your journey on organizing backordering.