Managing backorders is a balancing act. While it would be great if you could ship every order without ever having to put an item on backorder, the reality is that eliminating all backorders might require excessively high inventory levels and more than likely create a cash flow problem.
In the end it comes to properly managing inventory and when it comes to managing inventory the 20 / 80 rule tends to apply. Simply put 20% of your products probably account for 80% of your sales. Ensuring those best sellers are always available will go a long way to ensuring that backorders do not become a big problem.
While that sounds easy, in practise without systems like Orderbot, managing inventory can become a nightmare and backorders can get quickly out of hand. Not only will Orderbot tell you which products are the best sellers, it will also provide the status of any product at the push of a button including:
- Sales History / Sales History by Customer
- Current Stock on Hand
- Units on Order
- Units that should be on order
- Estimated Delivery Time
- Units on Backorder
- Open Sales Orders / Open Sales Orders by Rep
Several studies point to a cost of $10 for each unit backordered. Using that as a guideline backorders for a company that ships 1,000 units per month and has a 10% backorder rate cost up to $12,000 per year. Depending on the type of company the cost to eliminate backorders might be 10 times that amount – $120,000. The magic lays in finding the balance between the cost of being in backorder and the cost of being over stocked.
In the past, many companies would have simply added a dollar to each unit that they sell in order to cover the cost of backorders. It works great in theory unless, of course, you have a competitor who has invested in better systems, like Orderbot, and can manage their inventory and backorders in order to create a strategic cost advantage.
Typically backorder costs can be divided into three areas.
- Expedited Shipping – showing the customer you care by over compensating on the shipping.
- Time Wasted – by your staff managing inventory and backorders without the proper tools.
- Lost business – cancelled orders, bad references and lost customers.
Items 2 and 3 are the big problems and go well beyond $10 per order. Wasted time is wasted money. Trying to speed up the process by adding more people can make it worse if you haven’t invested in better systems like Orderbot. Better systems can free up people’s time and that means you can get more done with the resources you have and avoid the costs associated with adding new staff.
Losing customers because of poor customer service is the nightmare scenario. It’s a two headed monster. First you lose the downstream revenue of an existing customer and then you have to acquire a new one. Customer acquisition can be a significant cost and there’s no guarantee you won’t lose the new one if you don’t improve the way you handle inventory and the inevitable backorders that result.
As we stated in the beginning, managing backorders is a balancing act between perfect customer service and the reality of how much inventory any company can actually afford to carry. It is one thing to miss a chance to bill the customer, it is quite another to ignore the customer’s needs and not communicate in a timely fashion. While having a product out of stock is a nuisance for the customer, having that order show up unannounced weeks or months later, without any explanation, might be cause for them to re-examine their relationship with your organization……and that is the last thing you ever want them to do.
With a system like Orderbot in place, management can make better strategic decisions in regards their investment in inventory. Admin staff and sales reps perform better with the right information at their fingertips. Managing customer expectations when it comes to backorders is the key. Keep in mind that a certain amount of backorders is not necessarily a bad thing. Sales reps armed with the right information can turn a small backorder into a larger order. Fulfilling a backorder is a good excuse to open the order book. At the very least, your reps can provide a positive customer service experience, waste less time and eliminate customer drop off.