Backorders and stockouts are nightmares to many dropshippers because of the negative impacts they might have on their businesses. Despite this, many are not willing to take time to understand the root causes of these issues, which likely results in more problems. Therefore, in this blog post, we will discuss backorders and stockouts in-depth, including their implications for your business. Once you have a better understanding of them, you will be able to make better decisions.
DEFINITION
Backorders and stockouts happen when sellers do not have the inventory on hand to ship them out to customers. However, the main difference is that items on backorders are scheduled to be resupplied by a certain date while those on stock-outs do not have a determined date for replenishment. For backorders, if the order consists of multiple items, the available ones might be shipped out first while the unavailable ones will be processed once they are ready. However, if a product is out of stock, it will not likely be available in the foreseeable future.
CAUSES
Two possible reasons for backorders include unexpectedly increased demand and a low level of safety stock. Regarding the first one, stores encounter backorders when there is a spike in demand for certain items. This could result from highly popular trends, festive seasons, or unexpected events. For instance, during COVID-19 lockdowns, many online stores that sell home entertainment systems and devices such as handheld game consoles and stereo systems ran into backorders due to the unpredicted surge. Additionally, the lack of planning for safety stock, which refers to the inventory that you store for emergency situations, is another cause. If safety stock is not carefully computed and prepared with proper forecasting and inventory management practices, you would easily run into backorders.
With regards to stockouts, the lack of funds is usually the main reason. In particular, they run out of cash to purchase and restock their inventory. This happens when store owners do not adopt good budgeting practices.
However, the problem might sometimes be out of your control as it might originate from the suppliers. For example, factories might face some bottlenecks in their production lines due to the lack of raw materials. Another example is holidays. In particular, manufacturers in China do not work for at least one week during the Lunar New Year, and this means your operations are interrupted unless you have planned your moves ahead of time.
IMPLICATIONS FOR BUSINESSES
The biggest impact that stockouts and backorders would bring to your ecommerce store is that they would discourage customers from spending at or revisiting your store. In particular, 91% of them probably won’t return to your store due to the negative experience, which could refer to unavailable items. This, in turn, could damage your brand reputation as bad words tend to spread quickly and far in the virtual world thanks to various communication tools.
BEST PRACTICES
While stockouts and backorders are unavoidable for dropshipping business, it does not mean you cannot do anything. By implementing appropriate measures, you, as a store owner, can minimise the chance of them occurring.
1. Update your ecommerce website regularly
You should conduct frequent checks on your website to match the records with your actual inventory. This is especially necessary for trending and hot-selling products because more people care about them. If customers see a listing on your website but later discover that they cannot have it in a short amount of time, this would leave a bad impression on them about your business. During promotional periods and holiday sales, you should also assign more staff members to monitor the website to ensure the information is up to date.
2. Communicate to your customers
If you detect an issue with the orders, you should inform your buyers immediately because the longer you let it sit, the worse the situation gets. Besides, it helps customers to better manage their expectations. You should phrase your messages to show your sincere apology for the inconvenience caused to them. Moreover, if you have a customer service team, you should let them know there would be an increased amount of inquiries on backorders or stockouts so that they can better handle the situation. For backorders, if customers are willing to wait for it, you should update them on any changes in the delivery, such as ETA.
3. Offer them gifts or discounts
Offering something as a consolation would help you to retain the customers. In the case of stockouts, you can give them discount codes for their future purchases when informing them about the inventory status. Similarly, for backorders, you could include a small souvenir as a token of appreciation for their patience and trust.
4. Work with multiple suppliers
This not only helps you to diversify your product catalogue but also provides you with more flexibility. In particular, if one supplier encounters some issues, you can quickly source the goods from others, which causes little to no disruptions to your day to day operations. Alternatively, you can partner with a dropshipping agent, who has a large network of partner suppliers. Since they dedicate many resources towards relationship management with factories, you do not have to go through the trouble of liaison and negotiation. Moreover, they would also provide you with other types of services, such as warehousing, customisation, and order fulfillment.
5. Invest in inventory management
This is a game-changer as it helps you grow your business more sustainably. In particular, by determining how often and how much you should restock your inventory and check with your suppliers, your business operations would become much more efficient. Some common methods include computing EOQ or reorder points. Besides, demand forecasting is an important aspect of this practice, which comprises analysing historical data from your store and conducting secondary market research. By finding the patterns that might cause you problems, you would be able to make informed decisions about your strategies.
If you are planning to scale your dropshipping business, besides following the guide above, you are also encouraged to work with a reliable dropshipping agent. This is because they would be able to provide your significant support and resources when it comes to back-end issues. These range from product & supplier sourcing to warehouse storage and ecommerce order fulfillment, or branded packaging & private labelling to quality inspection & product certification. With 30+ years of experience in logistics industry and 5+ years in dropshipping sector, Xianchao Logistics could help to bring your ecommerce store to a new horizon. Contact us today to find out more!
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