Backorder – What is it, definition and concept

The “backorders”, or “pending orders”, is an expression used to refer to a business strategy. This strategy consists in that the company sells products without the need for them to be in its warehouse, but knowing that it can have them immediately.

To save on storage costs, many companies have chosen to apply a strategy known as “backorder” or, in Spanish, “pending orders.”

With this strategy, the company offers and sells products that it does not have, that is, that are not in the warehouse, to customers. Although it does not have them in the warehouse, it offers and sells them because it knows that the supplier that supplies the product will replace it immediately.

With this strategy, the company does not suffer a stock break, that is, it never runs out of stock. In the same way that you save on storage costs, since you do not have to place large orders that, later, you will have to store in a place of your own company.

Those companies that use the backorder or backorders usually have their own warehouse, while complementing the logistics management with the backorder. That is, they have a limited stock to face the short term, but they do not limit themselves to selling that stock, but they accept many more orders than what is available. This, because the supplier, as we said, has the ability to replace the product quickly.

Therefore, we are talking about a strategy that, as we see, offers endless possibilities.

Backorder features

Among the characteristics of this strategy, the following should be noted:

  • First of all, it is a strategy. In Spanish, this is called a “backorder” strategy.
  • A logistics strategy, which allows you to play with sales and stock.
  • In general, companies tend to adopt this strategy, in the same way that they guarantee a minimum stock to avoid taking risks.
  • This strategy allows, among other things, to avoid stock out of stock and to continue selling products.
  • To do this, you must be sure that you will have the supply uninterrupted.
  • In this way, the company can continue to sell as if it had stock, although it has to warn that delivery times will be longer than usual.
  • Thanks to this strategy, the company does not lose the sales that would mean announcing that it does not have stock.
  • Indirectly, the backorder saves storage costs. Since the stock leaves as soon as it reaches the point of sale. In other words, demand grows above supply, so the product comes out as soon as it reaches the point of sale.
  • This practice has its advantages and disadvantages. Badly managed, it could deteriorate the image of the company.
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Advantages and disadvantages of the backorder

Resorting to this strategy, the backorder, offers numerous advantages to those companies that take risks and practice it. But, in the same way, we are talking about a strategy that, poorly designed and applied, could lead to serious problems for the company that practices it.

Therefore, below we are going to see the advantages and disadvantages of this business practice:

Backorder advantages

Among the advantages offered by this strategy, we can highlight the following:

  • It allows to avoid the breakage of stock at all times.
  • The business may never stop selling, maintaining its income stream.
  • Indirectly, the company saves on storage costs.
  • It optimizes the space in the company, since it does not have large warehouses of stacked goods waiting to be sold.
  • It allows to expand the product portfolio, since it is not necessary to have the stock to offer them.
  • They allow customer loyalty, as well as increase brand value. Since the customer can have the product before others, while it is always available to the customer, even though it is not in stock.
  • In essence, it is a practice that, well managed, has more advantages than disadvantages.

Disadvantages of the backorder

Among the drawbacks of this strategy, we can highlight those shown below:

  • If this practice is poorly managed, it could lead to a loss of clients and reputation, as the times could be excessive.
  • It requires planning and management, so it is also more complex than conventional strategies.
  • In a way, we always depend on a third party: the supplier. If this does not comply, we always run the risk that it ends up splashing us. And as in point one, it could cause us a loss of customers or a loss of reputation.
  • As delivery times increase, refunds and returns may increase. This, because we give the customer more time to reflect on the purchase.
  • In essence, it is a strategy that, if it does not work well, has more disadvantages than advantages.
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Backorder example

Numerous examples from everyday life allow us to see what the backorder is and how these companies use it strategically to increase their profits.

Among them, we could highlight that of the Californian company Apple.

When it launches a new terminal, such as the iPhone, they already offer it on their website before even putting it on the market, despite the fact that it is not yet in the distribution points. This allows the company to start the sale and generate profits, without the need to incur storage costs, among other things.

In the same way, another example could be that of the Sony company.

As in the case of Apple, another very illustrative case is that of Sony and Playstation.

When they launch a terminal, as in the case of the Playstation 5 (PS5), they accept orders even though they cannot cover all of them. Since they anticipate having enough stock to supply the demand, they begin to sell the consoles before they are found in the different points of sale. This allows the company to start generating profits without even having started the logistics process.

But like Apple and Sony, we have other examples.

Tesla, Samsung, as well as numerous world-renowned companies practice this strategy.

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