While no business ever wants to face the problem of backorders, it may be impossible at times to always have all the product you need in stock and ready to ship. Managing the flow of product so that you never have too little or too much, and anticipating large spikes in orders, is a serious balancing act that takes time to learn, and a good inventory system to perfect. Unfortunately, even when you have the experience and the system necessary, the only way to ever truly eliminate the possibility of backorders is to have impossibly high levels of inventory, which cost you money in the long run.
The 80/20 Rule
Most companies use an 80/20 rule when it comes to ordering inventory. The rule states that 80% of your sales should be covered by 20% of your available inventory. In other words, somewhere around three-quarters of your inventory should be extra, on top of what you think you’ll be selling in a given ordering period. This is particularly true for your best-selling items that see frequent spikes at unpredictable times.
If having excess stock around costs money, consider that the smart thing to do is to have more of your best-selling stock, and fewer of the products that don’t sell as well. It only makes sense to keep as many of your best-sellers on hand as possible, especially right before big shopping rushes.
That may sound straightforward now, but with the constant flow of orders from multiple store locations always coming in, and stock always leaving from different warehouse locations, it can get a little bit hard to manage without a good system like ERPLY.
The Risks of Backorders
Even if you follow this rule, there are likely going to be times when you have backorders come in. Usually, there are three main financial risks related to backorders:
- Lost business: If a client sees that you cannot deliver a products before a competitor, he most likely scenario is that they’ll cancel the order and go to a competitor.
- Lost time: The time it takes to manage the inventory, and solve backorder issues, can be a serious concern if you aren’t using an inventory management system that offers you up-to-the-minute data.
- Extra compensation for shipping: In many cases, it may be company policy to cover expedited shipping to the customer when they’ve had to wait for a backordered item.
Let’s discuss how to solve or avoid each of these issues, using an example from ERPLY regarding a special feature in the system.
Avoiding Lost Business
There are several things that you can do to avoid the risk of losing business when it comes to backordered items, but the most crucial is communication. Communicating with the client at every step of the way so that they know exactly how long they’ll be waiting, or at least an estimate of how long they’ll be waiting, is very important. If you can, offer them advanced warning on the product page of the backorder status, so that they can make an informed decision before they buy. This will lead to fewer cancelled orders and fewer poor reviews from clients who blame the slow shipping on you. If you are concerned that displaying a backordered status on the product will result in fewer sales, just remember – the same clients likely would have cancelled upon learning the item was backordered after the fact.
If you have an item that routinely goes out of stock, it may be beneficial to have a back-up supply vendor during peak sales months. The back-up vendor may change as you find newer, better options, but this can offer you peace of mind about that one must-have that you constantly find on backorder.
Avoiding Lost Time
If you don’t have a good inventory management system in place, you’ll lose a lot of time tracking backorders yourself. Here are some things that you should expect from your inventory system to help keep your business running smoothly:
- A follow-up system that stays on top of fulfillment. At any time, you should be able to see how long backorders have been waiting for fulfillment, and what the estimated fulfillment date is in real-time. Keep an eye on any orders that have been queued longer than usual.
- A warning system that informs you of when certain inventory items are getting low, so that you can restock before backorders become an issue. This is in addition to having an automatic ordering process; some items may sell out irregularly, so having that alarm lets you know when to take action sooner than expected.
Avoiding Paying More for Shipping
Finally, you do run the risk of having to compensate your customers in some way, usually by paying extra for faster shipping to have backordered items rushed to them. This may be unavoidable if it is company policy, so the best way to dodge this risk to be sure that you stay on top of inventory, and to make sure that you have good communication with the customer. Managing customer expectations through excellent customer service will be key to keeping this risk low. Make sure your customer service team can see inventory levels and estimate, so that they can pass this information on to customers as well. ERPLY makes this easy, because you can manage exactly what information in the system certain user groups can access.
Here’s another way to reduce this cost to your company: consider that some backorders can be turned into larger orders with great customer service. If a sales representative has the right information about the customer’s needs, they can turn a small backorder, which will cost you money on extra shipping, into a larger order. While you’ll still be paying the extra shipping, the additional product revenue more than makes up for your cost.
If a backorder is going to take longer than usual, you need to be proactive about telling the customer. This may result in other compensation costs for you, such as offering discounts or free samples to placate the customer for the longer wait. However, think of this is as a great cross-promotional opportunity and take advantage of the bad situation.
Making a Partial Sale with ERPLY
Within the ERPLY system, there is a way to create and manage backorders very easily, so that you always know exactly what to expect with the backorder process. Let’s look at this system in action.
It’s a common situation for many companies that a customer will need more of a product than what you have in stock. In order to get them what they need – avoiding a lost customer – you can offer them a partial sale, and put the rest of the necessary product on backorder.
To do this in ERPLY, the sales associate would create a sales order for the entire amount necessary, and then turn the sales order into an invoice. The invoice would be only for the amount of product that the customer received that day.
You can configure the option for partial sales in Erply’s settings.
When this happens, the ERPLY system automatically creates another sales order for the product that was not available at the date of sale. That sales order can be used to create a purchase order for inventory. This creates a trackable order that shows you precisely where the backordered inventory is, and when it can be expected to arrive.
When the stock arrives, the sales order for the amount of product that was still needed can be turned into an invoice as well, and the customer will be able to receive that remaining inventory. It’s an extremely simply system that manages the process of backorders without you having to manually create any new documents. ERPLY ensures that the entire order is connected in the system, so that you can easily track the order as a whole, and show that the customer did receive everything they needed.
This system has addressed the major concerns that are listed above with backorders:
- First, it gives the sales representative access to inventory levels, so that they can communicate to the customer how much inventory they’ll be waiting on.
- Second, it provides a way to track the backorder, with as much automation as possible, so that communication can continue to be transparent.
- Third, it streamlines the reordering process so that you don’t lose any time taking care of the problem.
- Finally, ERPLY allows you the data you need to provide better customer service to avoid any other financial risks.
Mistakes to Avoid in Backorder Management
Now that you’ve got a good idea of how to solve backorders, take a look at some of the most common mistakes that can occur in this process:
- Over-committing your backordered stock: One big mistake that companies make is to continue taking orders even after an item has gone into backorder status. The risk is that even after you get inventory back in stock, you still won’t have enough to cover your new orders. This can be solved by having a threshold where you automatically cut off orders, and by letting your entire sales team know what that threshold is.
- Not having a tiered list of back-up vendors: We mentioned earlier that having back-up vendors can be a huge help when it comes to backorders. But even more importantly is to have a list of vendors, in order from the back-up vendor you order from the most, to the vendor you order from the least. That way you can start moving down your tiers, always knowing that you have extra backups in case your go-to is also unable to help you fulfill orders quickly.
- Not keeping your inventory in the cloud or in a seamless system: If you have multiple sales channels, it can be deadly for your business if you don’t have your inventory in sync across all channels. ERPLY maintains a complete picture of your inventory in all channels, that is always synced and always up-to-date.
- Not providing a shipping date range instead of a firm date: If you are in the backorder process, it is much safer and wiser to offer the customer a range of dates when the shipping will be completed, rather than to say that an item will ship on a specific date.
- Finally, not anticipating bumps in sales: Using your own data, you must be prepared for increased sales during certain seasons, or due to certain triggers. Be sure you are always monitoring your audience’s habits so that you can adjust your inventory ordering levels appropriately.
These mistakes are the most common, but can be avoided with a good management system and a dedication to monitoring your inventory and sales data.
Managing Backorders is about Balance
Keeping your inventory system working for you is a key part in balancing backorders. Here are some ways to ensure that you are staying ahead of the game, now that you know how to handle the problems when they do arise:
- Be sure you have an automated reorder point assigned for all inventory. You need to know when, based on your own past data, certain items are likely to be getting low. Assign them reorder dates (perhaps weekly, monthly, or in other increments) so that the system can be automatically keeping this item in stock.
- Always be reviewing your inventory. ERPLY makes it easy with up-to-the-minute inventory reports that show you where your stock is, how much is where, and more. Be sure that you are monitoring how fast product is being sold, or moved, so that you can judge where spikes are causing faster than usual product usage.
Through these tips, you will be able to manage inevitable backorders more efficiently, and with fewer risk. ERPLY makes it easy with partial sales and other features, as well as with ongoing inventory management and review so that you find yourself in fewer of these situations. Find out more about how ERPLY can prevent backorder headaches for your business by contacting us today.
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