Backorders: Meaning, Causes, Solutions, and vs. Out of Stock

Summary

• A backorder is an order for a product that’s temporarily out-of-stock, which is expected to be fulfilled and delivered to the customer when replenished to the retailer’s on-hand inventory.

• Offering backorders has pros like increased sales opportunities and customer loyalty, but cons like replenishment risks and potential delays causing customer dissatisfaction.

• An order management system (OMS) is essential for optimizing backorder inventory accuracy and keeping customers notified and in consent of their expected delivery date.

• fabric OMS empowers businesses with advanced backorder capabilities, allowing them to seamlessly manage inventory and fulfill customer orders with efficiency and control.

In 2022, over half of global online shoppers reported being unable to purchase the products they wanted, and almost 60% felt that unavailability issues impacted their shopping behavior.

These issues have led to major consequences for retailers. A study from 2020 showed that unavailable products caused consumers to shop elsewhere, producing a total sales loss of $71.4 billion. According to Multichannel Merchant, out-of-stock situations cost companies over 10% in lost sales.

Efficient backorder management with a modern OMS

Offering backorders can provide several advantages for online businesses. Making inbound inventory available through backorders and automating inventory availability rules is a critical opportunity to improve customer experience and business performance.

In this guide, we’ll cover:

• What backorders are
• The pros and cons of offering backorders
• How they work and when to offer them
• How to stay compliant with the FTC’s Prompt Delivery Rules
• Additional terms you should know include stockouts, preorders, depleted stock, and more
• What merchants can do to get the most out of offering backorders to customers
• Backorders FAQ

Let’s begin!

What is a Backorder?

A backorder is an order for an out-of-stock product that will be fulfilled and delivered to the customer when the product is replenished. Retailers notify the customer the item is on backorder on the product page or in the order confirmation email, along with a date on which they estimate the item will be shipped.

Backorders indicate high demand for a product and allow retailers to capture sales even when inventory has temporarily run out. Offering backorders is inherently complex and requires a consistent and reliable customer experience.

Optimizing the backorder process using a robust inventory and order management system and forming solid relationships with suppliers can bolster a retailer’s ability to meet—even exceed—customer expectations.

Google Merchant Center

Google Merchant Center allows a company’s products to appear across Google websites and apps when customers search for product offerings or directly for a business. However, to use Google Merchant Center, businesses need to follow the formatting guidelines to ensure Google understands the data they submit.

For example, the availability [availability] attribute tells users and Google whether a business has a product in stock. The classifier [backorder] is typically applied for SKUs previously on hand but now out of stock. This is similar to the [preorder] classifier, which applies to SKUs that were not previously on hand and will be offered for the first time on a future date.

Benefits and Drawbacks of Accepting Backorders

Backorders can benefit enterprise retailers and customers in myriad ways when handled appropriately. Below are some benefits and drawbacks of accepting backorders in e-commerce:

How do Backorders Work?

A backorder is created when a merchant runs out of stock and a customer places an order for an item that is temporarily out of stock.

Generally, large retailers monitor and control inventory availability either in the OMS or their e-commerce platform, in combination with data feeds from their enterprise resource planning (ERP) system, point-of-sale (POS) system, and warehouse management system (WMS). But how exactly do backorders work, and how do they impact the overall order fulfillment process? Let’s dive into the general process and mechanics of backorders:

1. Retailer runs out of stock and purchases more inventory

When an item runs out of stock, it will typically be flagged on sales channels to shoppers as “out of stock.” The retailer then purchases more inventory and receives the supplier’s estimated inventory receiving date.

2. Customer places an order for an item that is temporarily out of stock

Retailers may offer backorder inventory as part of the product lifecycle and replenishment management process. Ideally, this information will be posted on the item’s product detail page with an estimated date for the item’s return in stock.

3. Backorder is created. The retailer informs the customer about the backorder status

The seller can create a backorder for the out-of-stock item, providing an estimated timeframe for when the item will be back in stock and shipped.

4. Backordered item is restocked, and the retailer fulfills the customer’s order

Once the retailer receives additional inventory from the supplier, the order is allocated through the Fulfillment Automation process.

5. Retailer updates customer with order and shipment details

With transactional emails and notifications, the retailer keeps in touch with the end customer throughout this process. Customers are notified when new inventory comes in and when their package is shipped and expected to be delivered.

Backorder Compliance With the FTC’s Prompt Delivery Rules

Merchants must follow the Mail, Internet, or Telephone Order Merchandise Rule outlined by the FTC.

By law, online merchants must follow the Mail, Internet, or Telephone Order Merchandise Rule, which outlines the rules for shipments, notifying consumers about unexpected delays, and refunding consumers’ money. According to the FTC:

"You must have a reasonable basis for stating that a product can be shipped within a certain time. If your advertising doesn’t clearly and prominently state the shipment period, you must have a reasonable basis for believing that you can ship within 30 days."

"If you can’t ship within the promised time (or within 30 days if you made no promise), you must notify the customer of the delay, provide a revised shipment date and explain his right to cancel and get a full and prompt refund."

"For definite delays of up to 30 days, you may treat the customer’s silence as agreeing to the delay. But for longer or indefinite delays – and second and subsequent delays – you must get the customer’s written, electronic, or verbal consent to the delay."

"If the customer doesn’t give you his okay, you must promptly refund all the money the customer paid you without being asked by the customer."

"You have the right to cancel orders that you can’t fill in a timely manner, but you must promptly notify the customer of your decision and make a prompt refund."

Large retailers with complex operations need to be aware of their legal exposures regarding obtaining a customer’s “consent to delay” for backorders. A market-leading order management system like fabric OMS can simplify the backorder “consent to delay” workflow by enabling customers to continually consent and receive notifications if the estimated delivery date changes.

Backorder vs. Out of Stock (Stockout)

People sometimes confuse the terms backorder and out of stock because they both indicate that inventory is unavailable. However, the difference is that customers can purchase items on backorder because they are only temporarily unavailable and have a date of resupply. An out of stock item cannot be purchased.

There are a few other terms retailers use to keep track of and replenish their inventory:

• Preorders: Orders for products that are not yet available.
• Depleted stock: The quantity of an item is critically low or at zero.
• Non-stocked: Retailers do not hold an item in physical inventory.
• Awaiting shipment/pickup: An item has been picked, packed, and is pending pickup or delivery.
• Back stock or safety stock: Inventory kept in reserve to ensure continuous availability.
• Dead stock: Inventory that has remained unsold for a long period of time.

What Causes Backorders?

Many factors influence whether an item is backordered, including surges in demand, inventory mismanagement, seasonal fluctuations, manual processing issues, supplier delays, and manufacturing or supply chain issues.

5 Tips for Getting The Most out of Backorders

1. Implement advanced inventory controls for better accuracy.
2. Create safety stock as insurance inventory.
3. Work with reliable suppliers to prevent delays.
4. Use an order management system for managing inventory.
5. Use demand forecasting to predict inventory needs.

Backorder Inventory Management With fabric OMS

To reap the benefits of backorders, retailers must focus on effective inventory and order management strategies. fabric OMS is a distributed order management (DOM) system built specifically to address the challenges enterprise retail brands face.

In addition to accepting backorders, businesses can designate eligible inventory that is permitted to be sold when the products are not on hand. fabric OMS will automatically convert orders to backorders and then release them from the backorder designation as soon as inventory becomes available.

Backorder FAQs

What is a backordered item?

A backordered item indicates the product is currently unavailable for immediate shipment, with an estimated shipping date provided by retailers.

Are backorders bad for your business?

Backorders can allow businesses to capture sales but can increase customer dissatisfaction if not managed properly.

What is the difference between backorder and out of stock?

Backorders indicate a future availability date, while out of stock means items are not available for purchase.

What does partial backorder mean?

A partial backorder refers to situations where only some items in an order can be shipped immediately.

How long do backorders take?

The length of backorder times varies based on suppliers and inventory management.