Have you ever been in a situation where you’re getting more orders than you can fulfil?
Sounds like a dream right?
While any e-store owner would love to have a challenge like this, it may turn into piles of backlogs and backorders if not managed well.
Moreover, the higher number of backlogs and backorders may also indicate that there might be issues with inventory management.
With that, let’s understand backlogs, compare them to backorders, and decide which one is better for your eCommerce business.
Defining Backlog and Backorder
In the eCommerce landscape, a backlog is referred to as the number of customer orders that are not shipped yet. So technically, this tends to be a large number as your e-store keeps receiving orders continuously.
Thus, sales backlogs are bound to happen. Even if you have an efficient inventory management system, you can’t fulfil all the customers’ orders immediately.
However, there are multiple other factors that may cause backlogs (Detailed discussion in the next section).
On the other hand, when you willingly accept an order for the temporarily out-of-stock product on your e-store, it’s called backorder. In this case, customers may want the products as soon as possible. But owing to stock-outs, you’re not able to fulfil the orders.
However, you need to be careful while accepting backorders. Ideally, you should take backorders only when you’re sure that you’ll be able to procure them and deliver them to your customers at the earliest.
Otherwise, they may backfire. For instance, if your supplier is not able to provide you with the goods, your customers will have to wait longer. This could eventually lead to building up their frustration, order cancellations, and loss of customer loyalty.
So it’s advisable that you take backorders only when you have a tentative delivery date from your supplier.
As a business owner, while you may want to fulfil your customer orders as early as possible, it’s technically not possible for a growing eCommerce business to completely avoid backlogs and backorders. The key is in managing them effectively.
Why Backlog Happens
Backlogs aren’t necessarily a negative indicator. This entirely depends on the underlying reasons that cause a backlog.
That said, let’s take a look at some of the factors that raise order backlogs in your sales process.
For example, a shopper placed an order on 15th January. However, they want the products to be delivered on 31st March.
Although it’s a pre-order, this order will be included in your order backlog until 31st March.
Customers usually place pre-orders when they want products in large quantities or ahead of the holiday season. It’s one of the most common types of backlog, especially for the b2b eCommerce companies.
Hence, such backlogs are nothing to be worried about. You only need to track and ensure that they’re delivered as committed.
Demand Outperforming the Supply
At times, some products may gain sudden popularity among the users. Take a newly launched product for instance. If it’s an instant success, its demand can grow exponentially but the production capacity may not be enough to meet the demand.
In such cases, suppliers can’t provide you with adequate inventory. With time, the manufacturer would increase the production and you may expect regular supply.
So again, such backlogs aren’t the reasons to be concerned about. In fact, it indicates that you’ll keep getting revenues for this specific product category in future.
Issues at the Suppliers’ End
Sometimes your backlogs could be an outcome of mismanaged supply-chain operations at your suppliers’ end. It may include:
- Poor demand planning
- Production delays
- Logistical challenges
- Lack of inventory management, etc.
Now, this is an external factor that you can’t control. However, as a business owner, you should look for alternate ways to procure goods and fulfil your customers’ requirements.
Also, consider having multiple suppliers in your inventory procurement strategy so that you can reduce your dependency.
There could be some internal challenges within your supply chain that may also result in an unmanageable order backlog.
Here are some of them:
- Inaccurate demand forecasting: If your management predicts an inaccurate demand forecast, stock levels can deplete sooner than expected. In such cases, the pending orders’ deliveries may get affected. So ensure that you forecast demand accurately.
- Errors in inventory tracking: Let’s say your actual inventory count in the warehouse is less than what it shows in your system. However, your website is receiving orders continuously. Thus, you may end up taking more orders than you can fulfil. You can avoid these challenges by investing in a robust inventory management system.
- Inadequate logistical infrastructure: Your backlog can also pile up if your logistics can’t fulfil the orders in a timely manner. This usually happens when you’re managing your logistics in-house. So consider outsourcing your order fulfilment process to a third-party logistics (3PL) supplier for better efficiency.
Ideally, you don’t want an order backlog due to the above reasons since you can control these internal factors.
How to Calculate Backlog
A backlog is often demonstrated as a ratio or percentage by comparing the order processing capacity with the total number of orders for that period. You can calculate it for a week or month depending on the sales unit volume of your eCommerce store.
The easiest way to check the backlog percentage is to divide the backlogged orders by the total number of units sold.
Here’s the formula:
Backlog = ————————————— X 100
Total Number of Orders
For example, you received 1000 orders for the week and you’re able to fulfil 900 orders. So your order backlog is 300 units.
And backlog rate is:
Backlog = —————— X 100 = 30%
Thus, you have a 30% backlog for the week. You can also track them on a granular level by calculating daily backlogged orders.
There’s no ideal percentage of backlog. But you can look at it like this:
- If your backlog percentage is increasing constantly, it means that you’re consistently receiving more orders than you can fulfil. It’s a positive sign for a business as long as your fulfilment capacity also increases steadily. However, you would also not want to pile up so much of the backlog that it becomes unmanageable.
- If your backlog percentage is going down and fulfilment capacity is the same, it indicates that new orders are slowing down. As a business, you certainly don’t want this to happen.
Need for Effective Backlog Management
A well-managed backlog is a sign of a healthy business and supply chain. At the same time, ensure that you measure your backlog and keep a tab on the variations regularly.
If not monitored systematically, it may cause chaos in the supply chain.
That being said, let’s understand the consequences of excessive backlogs and why you need to manage them effectively.
Increases Warehousing Costs
Let’s say your products are sold, but they’re still lying in your storage facility. The more time you take to get them shipped, the more you’ll keep paying for the storage of the items that are already sold.
From a business perspective, it’s not too wise to continue incurring storage costs on sold goods.
Hence, if you turn around the backlog quickly, you end up making space for the new inventory. Thus, you can optimise your warehousing costs.
Shrinkage in Margins
If you’re sitting on an excessive order backlog, you may have to expand your storage facility for the new inventory. Needless to say, it comes at a cost.
Thus, despite having the warehousing space, you’d have to spend extra on stocking just because your sold goods are still occupying the warehouse.
This would directly eat into your profit margins.
High Customer Churn
Excessive backlogs can disrupt your logistics operations. Since the logistics team would be busy fulfilling the old orders, new customers would also have to wait longer for their products.
In the era of overnight shipping and same-day deliveries, you can end up jeopardising your business by making your customers wait for too long.
As a result, your customers may start looking for alternative e-stores to buy from.
How to Deal with Backlogs
Now that we know what causes backlog, how to calculate it, and why it needs to be managed effectively, let’s go through some quick tips on dealing with backlogs.
Here they are.
Effective Inventory Management
First, you need to analyse whether your current inventory management processes are helping you turnaround orders quickly or it’s the bottleneck in your supply chain.
It’s because poor inventory management can lead to challenges like:
- Inaccuracies in stock count
- Lags in the shipping process
- Stock-outs, etc.
All the above factors directly impact your warehouse’s operational efficiency and thereby delay the order shipments.
Hence, ensure you closely monitor your inventory systems and also invest in advanced software to track and manage them efficiently.
Implementing an Order Management System
Also, consider going a step further by investing in a robust Order Management System (OMS).
An OMS can help you regulate your backlog by:
- Tracking all your customer orders
- Monitoring and managing your inventory levels
- Accelerating your order fulfilment process
- Managing reverse logistics effectively
Thus, you can optimise your order fulfilment, inventory management, and logistics. This would consequently help you stay on top of your backlogs.
Balance Fulfilment Rates and Backlog
As you track your backlog movement trends, you must also ensure that you monitor your order fulfilment capacity simultaneously.
If your orders increase rapidly but your current logistics infrastructure is not equipped to process additional deliveries, it’ll spiral into an excessive backlog.
Hence, before the backlog becomes unmanageable, find ways to increase your fulfilment capacity. One of the simplest ways to do this is by outsourcing your eCommerce order fulfilment to external logistics providers.
Maintain Contingency Stock
As discussed earlier, when there are discrepancies between system inventory and actual stock in the warehouse, it often results in sales without inventory on hand. Such orders are bound to get delayed till the new stock arrives.
In such cases, it’s advisable to maintain contingency stock in the warehouse so that you don’t have to wait until the new inventory arrives.
Thus, you can fulfil customers’ orders faster.
Maintain Communication with Customer
While it’s crucial that you tap your backlog before it becomes too chaotic to manage, it’s equally important that you keep your customers informed throughout the order processing duration.
It’s given that you’d provide a tentative delivery schedule to your customers as soon they place orders. But if there are any delays in the shipping, you must communicate it with your customers.
This would allow your customers to wait patiently while you clear your backlogs and deliver their products. Moreover, they’d appreciate that you value their time.
Backlog vs. Backorder
Here’s a quick comparison between backlog vs backorder for your easy understanding.
As we compared the backlog and backorder, it’s clearly evident that any eCommerce business is likely to have a sales backlog. In fact, it’s good to have a healthy order backlog.
At the same time, you accept backorders for out-of-stock products. Backorders are good only when there’s a high demand-low supply situation and you accepted the backorder to retain your customers.
Other than that, if you have to accept backorders frequently, it’s a sign that there are inventory-related challenges within the organisation. Hence, you must resolve that first.
Backlogs are an inherent part of eCommerce business operations and it’s nearly impossible to completely avoid them.
While a growing backlog is a sign that orders are increasing, ensure that your order fulfilment capacity is also expanding. In other words, your fulfilment rate has to match the pace of backlog so that you don’t end up amassing excessive backlogs.
Also, consider hiring external logistics services if you’re consistently unable to fulfil customer orders within the committed time period.
Frequently Asked Questions (FAQs)
What is an order backlog?
An order backlog is the number of customer orders that are registered on the website but haven’t been shipped yet.
How do you calculate sales backlog?
You can calculate the sales backlog by deducting the fulfilment capacity from the total number of orders received for a given period.
For example, you receive 100 orders per week and your order fulfilment capacity is 80 orders a week. So your weekly sales backlog is 100 - 80 = 20.
What is a backlog in order management?
A backlog is the number of customer orders logged on your system that are yet to be processed or shipped.
What is the backlog formula?
The backlog formula is:
Backlog = ————————————— X 100
Total number of orders