Inventory management is a risky business. Too much product on hand increases carrying costs. Too little reduces customer satisfaction. Finding the perfect balance between the two is near impossible.
The best managers know that they are in the risk management business and use every available tool to minimize their exposure. One key component is the cost of backorders. Knowing how much being out of stock costs your company helps refine the order decision.
There are both short-term and long-term costs associated with backorders. The short-term are the processing costs for multiple shipments to customers and receipts from vendors.
The long-term costs should keep you awake at night.
Being out of stock costs you customers. If you handle a backorder situation well with good communication, the first one or two times won’t have a negative effect. But, let it become a regular experience and you destroy loyalty.
Your marketing is less effective because people have become disillusioned with your company. Every promise is judged by your failure to deliver. If you don’t have a relationship with the inventory management team, you won’t have a clue that there is a service issue.
To measure the effect of backorders on your marketing, compare the order history of customers who have never had a backorder with those who had multiple out of stock experiences. Then, work with your inventory management team to minimize the problem.
Add notices to your website to let people know when items are getting low on inventory or out of stock. If the ability to reorder is questionable, remove the item from the website when inventory is depleted. You can always add it back, but you don’t want to go through the notification process and disappoint your customer.
Review the transactional emails to insure that they are communicating the right message to your customers. If an item is backordered, offer a substitute when available. If there is an extended delay, offer a gift or discount on the current order. Offering it on a future order adds insult to injury. And, always give your customer the option of canceling. Lost orders are disappointing. Lost customers are debilitating.
For more information on calculating the costs of backorders read: Are Backorders Sabotaging Your Bottom Line?