Unprecedented demand for a product can be a boon for any company — unless this demand pushes inventory into backorder territory. Backorders are a double-edged sword. When handled properly, a company earns upfront payment to keep its operations running and ensure demand for resupply. However, if things go wrong, order cancellations can mount, along with growing payment processing fees and lost customers.

The key to backorder success is robust logistics support. But building a backorder-friendly logistics strategy takes time. If you’re starting the process of accepting backorders during the fourth quarter of the year, when your industry segment is experiencing a spike, or in the midst of a pandemic, you’re going to end up with sleepless nights, upset customers and uncertain revenue. To handle whatever inventory challenges the rest of 2021 brings, start planning now.

Know the difference between backorders and stockouts

The foundation of a good strategy involves understanding the difference between backorders and stockouts. The difference can be clear from a sales and customer perspective. In the event of a backorder, a product that is currently unavailable can still be ordered. In the event of a stockout, it cannot.

However, this difference is not as clear for logistics specialists. Products that can be backordered typically will live on shelves next to ones that can’t. If a company fulfills incomplete orders, pickers and packers will treat an order that includes a backordered product like any other. Everything runs like normal in the foreground.

The difference between backorders and stockouts matters most on the backend. If a company supports backorders, especially during times of high or unpredictable demand — such as during holiday shopping or pandemic panic-buying — its software should be able to tell the difference between backorders and stockouts and track each instance appropriately. Automation is a lifesaver here because it can ensure orders are tracked and filled as soon as possible, which can appease waiting customers.

By comparison, handling backorders manually through emails and spreadsheets makes it difficult to keep track of which customers still haven’t received their order. In addition, tracking refunds separately can lead to workers filling cancelled orders and other issues.

Order management tools also can help companies fill orders based on what items they receive first, which minimizes order delays. Warehouse teams will be able to fill the parts of orders that are available now while the platforms handle order completion once backordered items are ready. This balance helps keep the fulfillment process running smoothly.

Backorders are a supply chain decision

Once your company’s leaders understand backorders and think it’s possible to handle them, the question becomes whether the company should accept them. The answer depends on your business model and partner capabilities. If your customers are willing to wait because they appreciate your company’s track record for customer service or unique, quality products, backorders can make a lot of sense. If your company provides luxury products, backorders may take away from the mystique that drives sales.

It is also critical to consider whether your suppliers can legitimately meet a demand spike. Can your manufacturers make smaller batches if you have a seasonal spike or need to bridge inventory gaps? Are their production facilities robust enough to add another run if your demand is sustained?

While you’re having these discussions with your suppliers, ask what they will need from you to respond to demand shifts as quickly as possible. You should be able to determine which one need the least amount of lead time and how you can reduce other suppliers’ lead times. The longer your supply chain is, the more tiers you will have to climb to understand how backorders will affect the network.

If your suppliers are less than enthused about your interest in allowing backorders, present them with data to support your choice. Your mission is to show that demand is likely to be sustained or that it will return to a more normal growth trajectory after a spike. Also, demonstrate how you can mitigate the bullwhip effect to assuage your suppliers’ concerns about being stuck with excess inventory in the event of an overcorrection.

Make a backorder plan

Once your whole supply chain team is on board, make a concrete backorder management plan. A solid plan should include the following elements:

• Data and inventory management: Set inventory levels to only need backorders when there is unprecedented demand. You don’t want a 2-3% increase in monthly orders to run you out of stock. Continually refine reorder levels based on current and historical data.
• Clear backorder policies: Define the situations in which backorders will be allowed and how they will be handled. Do you order more stock plus additional buffer stock for every product that reaches backorder status? Or will you use your next planned resupply to fill backorders for some products?
• Team-building and training: For the products that require an additional supply order, define who is responsible for making and confirming these extra orders. Choose if you want those orders to happen as soon as the final product is purchased, when it is packed and leaves the warehouse, or later. Even if you automate your resupplies, verify that each order has been received and confirm when you can expect resupply delivery.

If backorders are dynamic, you may want to appoint a different liaison for each supplier to ensure the best customer service. Also, define who is responsible for the additional warehouse work during backorder situations. This team will handle the volume when it arrives and stage it for order fulfillment. Train this group early and appoint team leads to control the flow.

Logistics best practices for backorder management

If a company is in a backorder situation, it likely will need to use products as soon as they arrive. Putaway only slows down the fulfillment process. Instead, warehouses should employ cross-docking. Cross-docking is an expedited fulfillment technique that uses a dedicated staging area and product locations to unload products from an inbound shipment, clear orders and get them outbound as soon as possible. To set up cross-docking, clear out physical space in your facility just for managing these products. Include temporary shelving, product-handling equipment and at least one mobile packing station so orders can be fulfilled efficiently.

Assign team members to each activity in the fulfillment process and ensure each is equipped with their own scanning, picking or packing equipment so they can always be productive. Warehouse managers will need to stay on top of dock schedules and be ready to pull together teams to unload product or get shipments moving if there’s a risk the fulfillment plan can run behind or if there’s a bottleneck at one door. Speed and accuracy are paramount.

In addition, warehouse managers will be more successful if they are well informed. As your company gathers inbound data, warehouse managers will know how many orders can be fulfilled with the products that will arrive that day and then prepare the orders for fulfillment. Once the managers figure out their fulfillment timing, they can schedule carrier pickups for the added volume and keep things moving.

How to choose the right tech support

Consistent, reliable communication between your multichannel sales and order management tools and the warehouse is also vital. Choose inventory management tools that are designed to support both backorders and cross-docking to effectively manage your warehouse and team. If you’re running multiple warehouses, verify that all elements are communicating clearly between locations. Line splitting across locations can significantly speed up operations, but it also can create a significant burden if the technology platforms aren’t in sync.

Always look for specific control systems to manage and determine actions within platforms. Backorder support within the software should be clear, with an easy option for setting a variety of backorder situations and rules for handling each. For example, the software could support a default backorder policy; an all-or-nothing policy that does not ship an order until all items are available; an up-to-X-shipments policy that breaks up an order into a given number of shipments to ship available items earlier and backordered items later; or a policy that ships items as they become available, even if that requires a higher number of shipments than normal.

Also, look for policy overlaps, such as how the system splits an order. Again, there may be cases when an order with a backordered item can be partially processed, allowing you to move it forward. Make sure that the appropriate chain of events to fulfill these orders in their entirety is clear and will not create confusion.

Once your logistics and inventory management technology systems and policies are in place, do a live test without notifying the warehouse. See how the fulfillment process runs, and identify any gaps or mistakes. Does the platform successfully work with bar code scanners for fulfilling partial orders? Is the process different for partial orders or when cross-docking? Does your team need to change its habits to manage the technical side of backorder management? Based on the test results, adjust the process before you start accepting backorders. The worst possible moment to try an untested system is when you need it at scale — and when poor execution can cost you significant revenue.

Call in logistics experts for help

Even with all of this internal planning and setup, a company may not be ready to handle backorders in all surge situations. To prepare to keep orders flowing during these times, consider enlisting the help of your logistics partners.

Warehouse experts might be able to help you avoid stockouts and backorders — or at least minimize their volume. They also work with carriers and routinely ship large volumes, which means they can help you secure space on a truck and avoid paying extra for the fast delivery you need. Third-party logistics (3PL) teams already are trained on advanced pick and pack techniques, including cross-docking. This means they can step in to help without first undergoing significant training.

Plus, if all partners are equipped with the right technology, it’s easier for everyone to quickly learn about your company’s business, preferences and platforms. Onboarding has become standardized, and the rise of application program interfaces and electronic data interchanges has made it easier for 3PL warehouse management tools to integrate with your order management, inventory management, enterprise resources planning and e-commerce software.

Keep customers in the loop

Logistics and fulfillment are a part of the customer service you deliver, especially if you’re banking on e-commerce orders for long-term revenue and sustainability. From the customer standpoint, this is managed via consistent communication. Use automated messages to reach out to customers when

• an ordered product is on backorder
• you have a date when you expect to receive an inbound shipment
• the order is filled and the customer is charged
• the shipping process has begun and the tracking number is available
• a product is delivered
• a delay occurs during these steps
• any other changes arise.

The more you keep your customers in the loop, the more likely they’ll be to forgive a delay.

Now is the time to test your systems and plan for scale. Talk with your partners. Update your website to keep things clear for all stakeholders. Train your team and psyche them up for what very well may be just around the corner.