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written by | September 6, 2022

Understand Everything About Backordering

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Backordering allows your clients to place orders even if you do not have enough goods. Backordering is used by businesses when a sudden rise in sales implies that things are being sold quicker than they can be supplied. It's a standard tactic utilised by shops worldwide when there's an increase in demand.

Backorders indicate that a product's demand exceeds its existing supply. Often, there is insufficient stock due to a production fault, inadequate safety stock levels, or exceptional demand. Although the product might not be in the firm's current inventory, it might still be in production, or the company might need to continue producing more of the item.

Did you know?

There’s a difference between backorder and out-of-stock items. Backordered items are typically forecasted to arrive, while out-of-stock items are not currently available in a company's inventory. 

What Is Backordering?

Allowing clients to place orders even when you don't have enough inventory on hand is known as backordering. Backordering is used by businesses when a sudden rise in sales causes things to sell more quickly than they can be stocked. Retailers all over the world utilise it as a standard procedure when they see a spike in demand.

Backorders are a common occurrence for companies who utilise just-in-time inventory management strategies, which limit holding costs by only receiving goods when they are needed. As a result, they have a deadline by which they must correctly estimate the customer's demand. Backordering plays a critical role in maintaining business operations in such firms or companies.

Also Read: What Are Different Types of Accounting Explained With Examples & Importance

What is the Procedure for Backorder?

Backordering can be understood by comparing an order fulfilment process where the items are in stock with one where they are out of stock.

This is the order fulfilment procedure when the products ordered are in stock:

  • A customer requests a product.
  • You create a sales order for the product.
  • You locate the item in your inventory and cross-reference it with the sales order.
  • To complete the order, you mail the goods to the customer.

The following is how the order fulfilment process works in a back-ordering scenario:

  • The consumer orders an out-of-stock item.
  • You place the item on the backorder and convert it into a purchase order for your seller.
  • The purchase order is sent to your vendor.
  • Your seller has fulfilled your order. You mail the item to your customer once it arrives at your warehouse to fulfil their request.

What Makes Backordering Important?

Backordering boosts revenue for your company and keeps clients from patronising rivals. It provides a few more essential advantages as well:

Customisation

Custom requests are simple to meet because back-ordering is just forwarding the customer's order to your supplier. For example, Harley-Davidson allows consumers to design their bikes in the United Kingdom. By leveraging backordering instead of a standing inventory, the company has transformed a practical business choice into an enticing selling factor for its consumers.

Also Read: What Is Accounting Rate of Return (ARR)? Explained With ARR Formula & Example

Cost Savings

Backordering cost alleviates the problem of overstocking items, lowering warehousing expenses. It allows shops just start to spend less on initial inventory. It also liberates money that would otherwise be locked up in inventory and holding fees. Tesla, for example, likes to store less inventory and create on-demand, minimising the amount of cash and risk associated with excess inventory storage.

Reduced Waste

Backordering saves wasted inventory since items have less time to become damaged or outdated due to the speedier turnaround. For example, if you sell air conditioners, you will see an increase in demand every summer. However, as winter arrives, the market plummets. You don't want to be stuck with unsold units during the winter since they might be destroyed by the elements or outperformed by newer ones next summer. Backordering allows you to satisfy summer demand with less risk.

Product and Brand Value Increases

Backordering is used as a marketing gimmick by some technology-intensive enterprises to boost the perceived worth of the product in the eyes of the consumer. For example, the Samsung Galaxy S10 5G, one of the first phones to enable 5G, was already on backorder in the UK before its release. The significant number of backorders means that the technique effectively increases customer interest and willingness to buy.

Causes of Backorders

A variety of factors can cause a backorder. Some are uncontrollable, while others can be avoided. Some of the most prevalent reasons for backorders are listed below.

Inadequate Inventory Control

Backorders are more likely if a company does not have enough stock levels or cannot keep track of inventory movement. Trends change quickly in the modern world, and the number of SKUs for each online business is growing. In such cases, employing the appropriate inventory management system is critical to maintaining a seamless flow of activities.

Inadequate Safety Stock

Safety stock is the excess number of things you keep in stock to address supply breakdowns or situations that might result in inventory shortages. If a product's safety supply is depleted, you may encounter back-ordered or out-of-stock scenarios.

Demand is Unusual

There is a higher likelihood of backorders when the order is anomalous. A product is in great demand in an online store. Despite good sales forecasting, it is often difficult to foresee the sudden rise in demand. Predictability, influencer marketing, or content marketing could drive unusually high demand. Furthermore, The addition of new retail channels may boost product demand.

Issues With a Supplier or Manufacturer

Companies depend on manufacturers to produce their goods and suppliers to supply them, thus problems that occur during either phase could cause a production timeline to be pushed back. For instance, a supplier might have to pause operations for an indefinite period of time or a manufacturing plant might lose access to a crucial raw material. The number of backordered items may increase as a company decides how to address the problem. In response, sales personnel are frequently in charge of answering any inquiries from customers about this procedure.

Techniques of Backorder Prevention

Though backorders are unforeseen and unavoidable in certain situations, there are a few preventative actions you may take. These are a few helpful hints to decrease backorders.
Keep an Eye on Popular Product Inventory Levels

Popular items or those in great demand could sell out faster than others. As an outcome, it is preferable to keep an eye out for the stock level of these items. In online shopping, nothing goes exactly as expected, so review the inventory periodically to manage inventory replenishment effectively.

Maintain a Safety Stock

It is preferable to possess a proficient scientific system for managing inventories to run a successful e-commerce firm. It can assist you in keeping track of the items that are currently in stock. One of the best tactics is to set a safety stock point to deal with supplier issues and unique needs. To avoid backorders, maintain excess supplies on hand, perform live inventory management, and proactively refill inventories.

Obtain Products From a Variety of Suppliers

It is advantageous to have various vendors who supply your goods. Backorders are usually produced when a supplier or manufacturer cannot provide enough items on time. Working with several providers might assist you in avoiding this issue.

Purchase Additional Products

Maintaining sufficient safety stock is the most straightforward strategy to reduce stockouts and backorders. But it may clog up your available storage space, drive up the cost of inventory and backorders, and affect your overall spending plan.

Also Read: What are Expenses in Accounting? Meaning & Types of Expenses in Accounting

Conclusion:

Backordering allows you to keep your client base and maintain sales even when you don't have much stock. It also benefits your business by lowering expenses, eliminating waste, boosting the value of your products, and enabling you to accept special orders. Backordering may be a profitable business strategy if you provide excellent customer service and use an effective system for managing inventories.

When dealing with a single out-of-stock item, back-ordering is exceptionally straightforward. However, suppose you have a stockout scenario across many goods or rely on back-ordering as your primary inventory strategy. In that case, you must be capable of matching each buy order with the corresponding sales order before beginning the order fulfilment process. It is advantageous to have an inventory control system that can simultaneously fit your sales and purchase procedures to manage your coming items and outgoing sales.
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FAQs

Q: Are backorders unsafe for business?

Ans:

Backorders may be detrimental to the company since buyers may seek alternatives rather than waiting for their product to arrive. However, there are a few things to think about. First, some back-ordered items, such as the next generation of video game consoles, are difficult to replace; committed customers are frequently ready to wait. Second, back-ordered products may generate media attention due to the product's popularity.

Q: Why do backorders occur?

Ans:

Backorders arise for a variety of reasons. On the supply side, a corporation may run out of a product due to supply chain inefficiencies, underestimating manufacturing capacities, or failing to deliver to physical stores. On the demand side, many individuals may be interested in the product, mainly if it is a new version of a popular product.

Q: What Is the distinction between backordering and being out of stock?

Ans:

A backorder and an out-of-stock situation are comparable. Whereas out-of-stock indicates that a product is unavailable, a backorder indicates that an out-of-stock order can still be placed but is not available for immediate dispatch. A corporation might keep it as out-of-stock if it does not want to sell more product units. On the other hand, a back-ordered product is more likely to return owing to a brief delay in product availability.

Q: How long does it take for the backorder to be filled?

Ans:

A backorder is a unique circumstance involving a specific firm or product. No industry standard or legislation specifies how long a backorder will take. Some businesses will quietly tell consumers when their goods are ready.

Q: What exactly is a backorder?

Ans:

Backordered items are out of stock and frequently in-demand items. The product availability is still being worked on. The corporation might be attempting to produce additional goods, handle supply chain difficulties, or transport finished goods to their shops.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.