A back order is worse than an out of stock. That’s because while out of stocks could indicate a merchandising mistake that you could quickly rectify, a back order issue goes much deeper. We’re talking about the financial repercussions of your supplier not having stock and the damage it can do to your reputation. Also, your customers don’t like having to wait for anything.
What is a back order?
According to Business Dictionary Online, a back order is “a customer order that cannot be filled when presented, and for which the customer is prepared to wait for some time”. That said, back orders aren’t ideal. That’s because, at its heart, it is the result of a mistake made by both suppliers and retailers.
Neither has predicted the demand for a product and thus the supplier runs out of stock and has to reorder it from their manufacturer or global head office. Of course, it’s a little more complicated than that since the whole process can also involve worldwide supply and demand and different markets.
As for why it happens, there are a few reasons.
For one, if you were to look at it from the perspective of a supplier, it could be as a result of a logistical problem. For example, a wholesaler requests its supplier to deliver placed orders to all of its stores instead of to its distribution centre. That might not be possible because a supplier could be limited by their transporting capacity. As a result, the supply chain breaks since the supplier can’t fulfil some of the placed orders.
On the other hand, a supplier might secure orders from retailers and begin manufacturing but then finds out that they can't meet the order. There is also the economic climate that can affect a suppliers’ ability to deliver orders on time.
In the case of this last reason, some suppliers might require Forex to purchase raw materials before beginning production. If the economy isn’t performing, interests rate might be high, which affects the exchange rate which, in turn, creates shortages of the Forex on that market. The result is a supplier who can’t supply orders timeously.
Is facing a back order all that bad?
While facing a back order isn’t ideal, that doesn’t mean it’s not the end of the world. In fact, there are particular instances where it can work in your favour. Such as an opportunity to deliver outstanding customer service.
Let us explain.
If you’re running a promotion, there is every possibility of you facing an out of stock scenario. That’s especially true if the promotion draws a lot more attention than you could have anticipated. Like a special on a Smeg stove for 30% less than its usual price.
In this case, while the promotion was set for four weeks, demand was so high that within two weeks, there was no more stock available. So, when a customer came in looking for the product, a plan had to be made.
It involved taking the customer’s details, getting someone from the retailer to call them and update them on what was happening and then supplying them with the product as soon as possible. Just to note, this all took two days. A week later, the retail store’s online marketing team received an email from that client praising the effort to help them get what they wanted.
If the customer is a little patient and willing to give you time to make a plan, it’s the perfect opportunity to deliver outstanding customer service and show them that they are not just a number.
Of course, the above is just one example, and it doesn’t always happen that way. You might do the same thing for another customer who doesn’t feel the need to thank you. That is the nature of customer service.
What you can do to prevent a back order
While back orders can sometimes work in your favour, the ideal situation is not to face them at all.
Of course, that’s wishful thinking. Anyone who has worked in the retail business long enough will have faced such a scenario before. If you don’t want to be such a retailer, there are ways in which you can prevent them.
1. Have a robust replenishment engine
One of the first things you can do to prevent back orders is to establish a robust replenishment engine. The reason for doing this is simple: a healthy replenishment engine allows your retail business to gain (and maintain) proper control of your stock.
As we’ve noted in a previous article, controlling inventory that comes into (and goes out of) your stores is vital to your overall business. That said, there is more to it.
Since inventory replenishment is linked to space planning, planograms also play an essential role here. For example, through the proper use of planograms, you can figure out your minimum stock levels which allow you to also uncover your minimum display depth (MDD) and your minimum depth quantity (MDQ). By incorporating these together with safety stock, you can then create what is known as a minimum stock reordering trigger point.
By gathering this data, you know how much stock should be kept in-store and what quantities of each, relative to how much space is available.
All of this data is then fed into your replenishment engine so that when you reach your minimum stock level, your engine kicks in and orders more stock. That means that you’ll suffer less out of stocks. In fact, when working optimally, you won’t suffer any out of stocks at all.
A robust replenishment engine will also allow you to identify dead or slow lines before your next re-ordering cycle. That allows you to make an informed decision on what to do next.
2. Plan and manage your stock better
Since we’ve already established that a back order is the result of bad planning, the explicit action to take would be to plan better.
Planning better comes down to adopting a space planning process which involves data-driven planograms. There is a sound reason for doing this.
By adopting this process, you can identify your fast-moving lines and allocate space according to the rate of sales as reflected by your days of supply. You’ll also be able to locate any slow-moving lines so that you can derange them and create planograms that speak to the different strategies of each category in your store.
Let’s take the example of Easter to illustrate our point.
This seasonal event means that many stores are stocked with chocolate bunnies and eggs and hot cross buns amongst other items. And they are all at hugely inflated prices. A week later, you’ll find these stores still stock these items but at a reduced price. Of course, it’s better to overstock than understock but, both scenarios result in severe financial consequences.
Instead, before you order your stock for Easter, it would be better to look at the retail data from the year before. That includes looking at your total sales, total gross profit and total units sold. In fact, it’s worth looking at historical data that dates back past last year to spot any trends. In doing that, you could see how much stock was sold and what was left over. More importantly, with this data at you fingertips, you can order the appropriate amount of stock for this period.
That means a reduction in overspending and overstocks and an increase in profits.
3. Choose the right suppliers
To ensure you don’t sit with back orders - at least not regularly - you need to ensure that you pick the right suppliers from the beginning.
One way of doing that is to put prospective suppliers through a screening process. To become a supplier, they’d thus need to adhere to a strict set of rules and standards. If you don’t already do this when choosing your suppliers, it’s worth having a look at implementing such a process.
So how will you know when you do have the right suppliers?
Besides compliance with the set of standards that we’ve just mentioned, they’ll also have your best interests at heart. That means they’ll show accountability should there be any quality defects or issues related to their products. They’ll also willingly supply you with information about their products if you need it and even allow you to inspect their production facilities.
Of course, there is more to it than simply meeting a set of standards.
‘Retail presence’ is another way to determine if it's worth taking on a supplier or not. In this sense, it’s not just about whether a customer knows the brand but also whether or not your staff knows it too.
For example, your store stocks three types of camera brands - Camera A, Camera B, and Camera C. Sales reps for Camera A and B visit your store weekly and ask questions about stock levels and sales figures. They show interest in what is happening and build meaningful relationships with your staff. Meanwhile, the rep from Camera C doesn’t take an interest in developing any relationship and only ships stock when needed.
Ask yourself, with which camera brand would you prefer to do business? The answer should be apparent. That doesn’t mean you should avoid Camera C as a supplier altogether. However, it does mean that you should know what you’re getting yourself into when taking on different suppliers.
Of course, you should also ensure that the suppliers you choose are aligned with and believe in your business’ strategies and goals too. When they are onboard and understand what you want to achieve and what you expect from them, it’s easier to move forward together.