Backorders occur when an item is out of stock and cannot be fulfilled at the time of purchase. Companies try to avoid backorders as they can lead to a bad reputation and loss of customers. Inventory management is crucial to balance stock levels and avoid backorders. Customers are usually notified of backorders and given the option to wait or cancel their order. Companies may offer compensation to maintain customer loyalty during backorder periods.
A backorder is an order that cannot be fulfilled at the time it is submitted because the stock to fulfill the order is not available. Businesses usually try to avoid backorders because customers generally want orders fulfilled immediately, although they may be willing to wait in some circumstances. However, companies also can’t always predict how orders will move, which can make it difficult to make decisions about what to stock. Therefore, the company is constantly engaged in inventory management.
Typically, when a customer places an order for something that a business knows they don’t have in stock, they will notify the customer that the item has been re-ordered. The customer has the option to cancel the order without penalty or to wait for the items to arrive, and an estimated shipping time is usually provided to help the customer make this decision. If the customer is willing to wait, their order will be fulfilled when the stock arrives.
Sometimes items are reordered for longer than expected. In these situations, companies may waive shipping costs or offer other compensation to customers as a reward for their patience during the back order period. This is also designed to maintain customer loyalty, so customers will be inclined to frequent that company again despite the back order issue because they remember being treated well.
For businesses, backorders can be costly. In addition to being associated with costs such as administrative fees, backorders can also lead to a bad reputation, which can cause future orders to be missed by customers. Even when backorders are beyond a company’s control, such as when a manufacturer limits supplies of a popular item and a company orders as much as possible but can’t keep up with demand, customers can see the company unfavorably. Especially if a customer repeatedly encounters a backorder for an item, that customer may do business elsewhere.
Inventory management requires keeping enough goods in stock for a business to meet the needs of its customers, without overstocking. Overstocking requires excess storage space, which costs money. It can also force companies to return items at the end of the reason, which is expensive, and when goods aren’t returnable, the company may be forced to sell them at a discount to run out of stock, potentially making a loss. For this reason, companies try to balance their inventories to avoid a backorder situation while keeping the amount of items in stock reasonable.
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