How To Get A Handle On Backlog Inventory And Backorders

June 25, 2022
10 min read

In this article:

A strategic guide to using inventory backlogs to reduce backorders (or prevent them from happening in the first place).

We've said it before, and we'll say it again: Your products are everything to your direct-to-consumer (DTC) brands. And keeping those products in stock is a top priority. But that doesn't always stop stockouts from happening.

And when your products stockout, you set customers up for disappointment and miss out on valuable revenue. Luckily, you keep folks happy and cash flowing with a backorder strategy. But only if you have a handle on your inventory backlog.

Here's how your inventory backlog fits into your backorder strategy and how to use this tool to your advantage.

Key differences between a backlog and a backorder

While related, backlogs and backorders are not synonymous. Backlogs are an accumulation of unfilled orders or unfinished work within the fulfillment and production planning processes. Meanwhile, a backorder is technically a backlog where the ordered product is currently out of stock.

What are backlogs?

Backlogs are all the products customers have ordered that have yet to be shipped. If someone purchases a watch from your company on June 1st with a ship date of July 1st, that item will now be part of your inventory backlog.

What are backorders?

Backorders are a type of backlog in which unfilled orders are out-of-stock products that'll be delivered once they're back in stock. Lots of retailers sell on backorder with the guarantee that they'll ship orders by a certain date. Note that all backordered products should be included in your backlog, expressed in terms of total dollar value.

Why backlog is a good thing in supply chain

In certain contexts, a backlog methodology can have a negative connotation. This is especially true when people feel "backlogged by their work." Meaning, they're overwhelmed by personal responsibilities or feel like they can't catch a break.

Similarly, backlogs in supply chain management are typically seen as a bad thing. That's because backlogs indicate you're not keeping up with fulfillment (so you risk taking orders you can't fulfill).

However, backlogs can be good when you can stay on top of your order and fulfillment workflows. With properly managed backlogs, you keep customers happy, boost your brand's reputation, and generate revenue, even when you're out of stock.

You keep customers satisfied

Customers who hit an out-of-stock message on your website can't complete their purchase. And the frustration or disappointment that consumer experience causes can lead even the most loyal customers to your competitors.

That's why roughly 70% of apparel brands, for example, will recommend substitute products to try and prevent lost sales when they don't have safety stock available. And per Lucidworks, 76% of shoppers are happy to purchase an alternative product. Though, 69% also said they'd do so with a competitor.

Alternatively, when you have products available on backorder, you give customers the option to finalize their purchase. And if they choose to hit "buy," you provide clear expectations for when those backlogged products will arrive.

This can be a huge boost to customer satisfaction and retention. Why? Because it empowers shoppers to make their purchases as planned and gives them something to look forward to.

Even still, customers only stay happy if you set clear expectations on when they'll receive their order, but only if you then deliver on those expectations. An organized backlog makes it easier to do that.

Your brand enjoys a good reputation

Continuing the above thought, the ability to satisfy consumer demand can also boost your brand's reputation. Satisfied customers are apt to be repeat customers — and they're also more inclined to tell their friends and family about their positive experience with your brand.

In fact, a staggering 72% of customers will tell ~6 people about your brand if they've had a good experience. They'll tell even more people, however, if they had a bad one (like when you're constantly sold out or their orders are late).

So, say your brand knows the stock replenishment is coming within a certain time frame. Then, you can start selling those products on backorder.

Better yet, if the replenishment date is within the timeframe that you'd typically ship out a purchase made today, you can even sell the product as if it's currently in stock. (Just make sure to build a backlog as you go.) From the outside, this strategy will look like your brand has its act together since you haven't advertised you're operating on a backorder model.

Then, staff a larger fulfillment team the day that shipment arrives at your warehouse. That way, you can work through the backlog as soon as those products are back in your warehouse. And do it without doubling your team's workload.

Not to mention you'll also radically reduce your cost of holding by storing fewer items once the backlog is worked through.

You experience a higher revenue flow

A substantial backlog can sometimes feel like a source of stress for DTC brands. But the reality is that accumulating all these orders can be a good thing for business. The bigger your backlog, the more revenue you’re looking at for your brand (as long as you can meet customer expectations within the promised timeframe).

Out-of-stock products stop your cash flow (because customers can’t buy what they want). Meanwhile, a backlog allows you to keep collecting orders and payments while waiting for your inventory levels to be replenished.

This uninterrupted revenue flow can do wonders for your bottom line. And it ensures you maintain a healthy amount of working capital while you wait for your replenishment to arrive.

By taking orders (even with delayed fulfillment), your brand ensures it has working capital available when needed. For instance, you could use that cash to expedite purchase order lead time by opting for faster freight methods when things go really wrong. Or you can hire more hands in your warehouse to fulfill orders faster.

Why selling on backorder can also be beneficial

Just like backlogs, backorders often get a bad rap among retail brands. Business owners tend to overlook the benefits of selling on backorder. And they often fail to acknowledge the positive impact it can have on their store.

But the truth is, backorders can help your company save money on storage space, gain insight into consumer behavior, and increase product value.

Save money on storage space

Brands selling on backorder require much less warehouse space than brands holding a high volume of inventory on hand.

Think about it — you don't need a large warehouse space when you only store a few items consistently. So, fewer items in stock translate to smaller warehousing requirements, reducing your warehousing costs by roughly $7.50 per square foot shed (to be exact).

But on top of that, having fewer storage needs also reduces the cost of carrying your inventory. You only add to your total inventory costs when holding onto items that don't sell (like dead stock). And, consequently, you lower your gross profits.

But by selling on backorder, your brand can begin production or manufacturing after receiving customer orders to keep your overhead costs to a minimum.

Gain insight into consumer behavior

 Selling on backorder offers unique insights into product trends, consumer behavior, and more. As you're collecting customer orders on backordered goods, you can simultaneously collect (and analyze) the data around each order.

This data might include inventory turnover ratio or days inventory outstanding (DOI) — among other inventory KPIs. Plus, it'll highlight what items customers are willing to wait for.

With this information at your fingertips, you can identify purchasing patterns that'll guide your replenishment cycles, safety stock, and other inventory management decisions.

For example, when examining your turnover ratio, you'll better understand when, what, and how much you need to order to reach your economic order quantity (EOQ).

Increase product value

Over the last few years, fear of missing out (FOMO) has transcended social events and group outings. And it even influences what products we buy. That's because FOMO creates a sense of urgency and scarcity around purchasing a new product or having the latest gadget.

Take the technology sector, for instance. Apple is widely known for operating on a backorder model for its latest releases. When Apple introduced the iPhone X in 2017, US customers were on board to wait up to 6 weeks for their order to arrive.

For one, these backorders created a lot of hype around the iPhone. But they also increased the product's value (and customer's perception of it). In other words, the high demand for this backordered product made customers want to purchase it more than if the product was always fully stocked.

5 ways to improve how you handle backlog inventory

A healthy inventory backlog balances having too many and too few order numbers on hold. To optimize your backlog management, you can set up a contingency plan, diversify your supplier portfolio, improve your forecasting methods, and more.

1. Set up a contingency plan

A contingency plan is all about helping you respond to negative or unforeseen events. And by setting up a contingency plan for product procurement, you can maintain just the right amount of backlogged orders. That way, your revenue is steady without falling too far behind on fulfillment.

For example, say you’re amassing a lot of orders, and your warehouse team doesn’t have the bandwidth to fulfill them all as scheduled. Then, you might want to switch to a backorder model. This way, you can better control how much time you have for the order fulfillment process.

Alternatively, you might notice that your backlog is stagnant (and you aren’t receiving many new orders). Then, you can try attracting customers by running a marketing event or offering product bundles.

Driving sales via discounts and bundling is a great way to grow your backlog and generate more revenue for your brand.

2. Diversify supplier portfolio

If your inventory backlog results from supply chain delays (instead of increasing customer demand), consider diversifying your supplier portfolio.

Supplier diversification is a common retail strategy that helps mitigate risk throughout your supply chain. This process generally involves partnering with backup suppliers of various sizes and locations than your primary warehouse or fulfillment center.

Investing in vendor diversification can reap several benefits for your brand — like working through your backlog faster or possibly securing better prices on fulfillment.

Just make sure you consider your obligations to your existing suppliers when you negotiate vendor contracts with alternative providers. Otherwise, you might end up with a lot of excess inventory or costly contract termination consequences. 

3. Improve forecasting methods

Keeping an order backlog can help make your inventory forecasting much more accurate.

That's because you unlock high-value inventory insights when you review your backlogs. And you can use those insights to inform your operational plan, like how many units to reorder and when.

That way, you order enough inventory to fulfill all the future demand that comes your way. And if done right, you might even make your backlog obsolete along the way.

4. Gain a real-time view of your inventory

Having insight into your inventory — where it’s located, where it’s going — is foundational to your brand’s success.

By prioritizing inventory visibility, you’ll get a front-row seat to how well your SKUs sell and how quickly customer orders get fulfilled.

Plus, when you integrate your backlog with an inventory system or operations platform, you’ll have a real-time overview of your entire product catalog.

This 24/7 data monitoring helps maintain inventory accuracy and ensures better inventory control over every item you sell.

5. Place smarter purchase orders

Since a backlog is a record of all your unfulfilled orders, it can actually help you place smarter purchase orders with your suppliers.

When you can see all your orders at a glance, it’s much easier to know which goods you need to restock. Even better? Most ops optimization tools like Cogsy manage backlogs and automate POs.

For example, Cogsy is equipped with automatic replenish alerts that tell you exactly when to reorder (and what quantity you need).

By utilizing this information, your purchase orders become more accurate. Plus, your production schedules will have a better chance of going according to plan.

Use backorders to your advantage

Backorders can be a huge advantage for your DTC brand. That is if you handle backordering in an efficient and well-managed way.

By teaming up with Cogsy, your brand can tackle backorders while increasing revenue, enhancing customer satisfaction, and driving your brand's growth.

Increase revenue (even during a stockout)

As I mentioned, nobody likes a stockout -- least of all your customers. When your products are out of stock, customers are apt to grow frustrated with your brand since they can't buy what they need.

And when customers can't purchase from you, there's a good chance they'll spend their money with your competitors instead. In that way, stockouts can trigger lost sales right and left.

The good news is that selling on backorder allows your customers to buy items even when they're not in stock. This not only increases brand affinity but increases revenue, as well.

Cogsy helps retailers seamlessly pivot to a backorder model. That way, you can convert demand during a stockout and keep cash flowing in the right direction.

Even better, Cogsy stores the backlog of all your unfulfilled orders in 1 convenient place. This makes it effortless to fulfill that demand whenever the product is back in stock.

Enhance customer satisfaction

The reality is a negative customer experience hurts brand loyalty and unfavorably impacts your customer's lifetime value (LTV). And one of the most common ways to ruin a customer's experience is by running out of inventory and posting an out-of-stock message on your website.

When this happens, customers are less likely to revisit your site and more likely to shop with a competitor. This loss in retention can have long-term consequences that'll hurt your brand's future viability. After all, lost customers means lost revenue, too.

The solution? Start selling on backorder and keep your customers happy regardless of how much inventory you have on hand. When you team up with Cogsy to sell on backorder, you can enhance customer satisfaction by ensuring you can always complete future orders.

Drive your brand's growth

Backorders are an excellent way to drive growth for your DTC brand.

With a backorder model, your customers can order any SKUs they want. It doesn't matter what your product availability is at that time. In doing so, your company can drive revenue that'll fuel your future growth.

Want to see how backorders can give your brand a boost? Request a free demo from Cogsy today.

Backlog inventory handling FAQs

Get answers to the most common backlog inventory questions.

What is a backlog in order management?

In order management, a backlog is all the products customers have ordered that have yet to be shipped. For example, say someone purchases a watch from your company on June 1st, but it won't ship until July 1st. Then, that item will be added to your inventory backlog in the interim.

How do I reduce a big backlog?

One of the best things retailers can do to reduce their backlog is to limit its scope. This means choosing a specific, measurable goal to work towards over the next few months — like acquiring a certain number of new customers or increasing engagement by a certain percentage.

Whichever goal you create will direct the focus of your inventory backlog. That's because you can remove all inventory items that don't help you reach your main objective.

What is a backlog good for?

A backlog is good for establishing prioritized, actionable items your fulfillment team must complete. This helps business owners and product managers communicate with their team which customer orders (or production) to prioritize next.

Reach your revenue goals

See how Cogsy automates backlogs and backorders, so you always convert customer demand.
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