Often backorders have been viewed as ‘shadow’ transactions
Chief supply chain officers (CSCOs) tasked to grow direct-to-consumer (D2C) selling and other forms of digital commerce, must implement four actions to navigate ongoing supply chain disruptions, according to Gartner, Inc. These disruptions have resulted in out-of-stocks, missed sales and disappointed consumers.
“Disruption has become the new norm for supply chains. Especially during the competitive holiday shopping season, brands that go out-of-stock risk losing a consumer to a different brand,” said Claudia Clemens, Senior Director Analyst with the Gartner Supply Chain practice. “By having a proactive backorder strategy in place, supply chain leaders can maximize their potential earnings and better serve consumers in the digital marketplace.”
The four actions that Gartner recommends for CSCOs will allow them to build a proactive backorder strategy that enables backorder planning and capabilities in digital commerce. The four actions include:
Segment Consumer Products as “Backorderable” or “Substitutable”
CSCOs should begin by defining which products promise high-confidence backorders. This can be accomplished by using a defined set of criteria to decide which products are “backorderable” — making it possible for online sales to continue up to a defined quantity and future delivery.
Similarly, during the same segmentation process, a stock keeping unit (SKU) which may not be backorderable, may be included in a group of products called “substitutable.” In this case, the attributes do not justify taking backorders, but viable similar products could be recommended to consumers as alternatives if the primary item goes out-of-stock. The primary item and its substitute would be defined as substitutable.
“Some consumer products make better, or more reliable, backorder candidates, and some are more suited to be substitutable. Regardless, every product should have a predefined out-of-stock action that has been assigned based on factors including product life cycle, reliability of supply, lead times and risk/benefit to hold inventory on hand vs. ‘make-to-order’,” said Clemens.
Weigh Performance with Backorder Metrics
To drive alignment and end-to-end accountability, it is important to define and implement both metrics and tolerance levels (or thresholds) for backorders when implementing a proactive backorder strategy. Without metrics and visibility, challenges can arise such as unanticipated demand volume causing bullwhip signals, poor allocation prioritization, capacity misalignment and cross-functional friction.
“Often backorders have been viewed as ‘shadow’ transactions within the ‘real’ supply chain. An order is pending but can get lost amid the daily, more defined, more visible operations. It is critical to have tracking in place to understand, for example, if volumes are growing and how long to continue to take backorders, if any backorders are past due, and how accurate promised delivery dates are,” added Clemens.
Involve Other Functions
A successful backorder strategy will involve input and coordination from multiple function areas. Both internal and external partners should be proactively engaged, including customer service, warehouse and logistics, sales and marketing, and fulfillment within the company, as well as suppliers and consumers.
“Cross-functional involvement should start in the planning process when performing product segmentation and deciding which items are backorderable or substitutable. From there, backorder discussions should be an ongoing topic in sales and operations meetings. Engaging suppliers in backorder strategies is also essential and gives them the chance to surface any unknown risks in advance,” said Clemens.
Make Backorders Part of the Supply Chain Playbook
Traditional supply chain playbooks lack an approach to digital commerce backorders and result in a reactive approach to out-of-stock (inherently seeing backorders as “bad”). By focusing entirely on being in-stock or mitigating out-of-stock (backorder avoidance), supply chains deliver inconsistent performance both in internal operations and in consumer experience. Gartner recommends incorporating backorder planning into the supply chain playbook to improve overall execution and enable new insights and capabilities.
“For example, factor in how unified commerce strategies can be incorporated with backorders to give consumers hybrid options such as pick up in store, or location-based availability. Customers expect a unified experience that traverses easily between digital and physical, converges with mobile, social media and the Internet of Things (IoT) – and thus can serve them however, whenever, and wherever,” Clemens concluded.