Out of Order

Steve Dethlefs, DC Manager
Pendleton Woolen Mills
Portland, OR

Our fashion merchandise is basically perishable, so our planning is tight. We don’t want to end the year or season with more than we need. To get the ball rolling, our planning team places an initial order for about 75% of the anticipated demand. As orders start coming in, if demand exceeds or falls below the original forecast curve, the subsequent purchase order will be adjusted accordingly. Since our apparel is shipped in from Asia, we have a small window of time in which to make everything fall into place.

Once a product arrives in the building, it is visible in our WMS system. If we are expecting an item needed to complete an order, we know exactly where that SKU is in the supply chain. For example, we make sure that an inbound shipment isn’t passing an outbound shipment at the dock. Or, if it’s going to be a matter of days before a backordered product arrives, we’ll hold order allocation until that item arrives at the dock or before sending a pick ticket.

About 50% of our customers are department stores; some have policies that limit the total number of backorders we are allowed to send, and others don’t accept backorders at all. And many have such tight shipping windows that we essentially have one chance to meet their deadlines.

Our initial ship to the customer is usually around 93%-94%. Still, no matter how well we manage the supply chain, 6%-7% of those items aren’t going to be here, usually due to late production by the vendor. Just one percent goes out in a third shipment. We find that strong vendor relationships are critical in managing backorders. A vendor who knows and values our business model is typically more sensitive to our needs.

Todd Melinn, COO
Active Mail Order
Ontario, CA

We don’t backorder. More than 75% of our business is Web-based and features real-time inventory. If a customer sees a product on our Web site, we have it in stock.

We avoid backorders because we’ve found that when our typical customers — Web-savvy kids and young adults ages 12 to 24 — place an order, they expect to receive product within a week. We do offer an “e-mail me” feature for hot or new items that we don’t have in stock. A customer can provide his name and e-mail address, and as soon as the desired product arrives, we will send him an e-mail with a link to the product order page. We also offer a wide product selection; if we are out of a particular product from our Web site or catalog, we can suggest a new or better item.

Since trends in the skateboarding industry change rapidly — and the products are made overseas, with a lead time of 2-3 months — it doesn’t make sense to backorder. Unfortunately, this means that we might miss out on a hot trend. For instance, last holiday we had a pant that sold out quickly. We made a special order for spring, but within six months the trend changed, and that product that was so hot is now sitting on our shelves.

Rodney Cathey, General Manager
LifeWay Christian Resources
Nashville, TN

We fulfill three main components of LifeWay out of our 250,000-sq.-ft. warehouse in Lebanon, TN: our trade division, Broadman & Holman; Church Resources, for churches and individual consumers; and our retail division, with 120 LifeWay Christian stores across the country. We have about 14,000 titles.

For Broadman & Holman, the marketing department and buyers list 15-20 new titles they expect to be heavy hitters. Since they want these to arrive in one shipment, they give us two days’ advance notice before the orders hit the warehouse, so we can strategically slot those products for efficient picking and packing.

On the other hand, in both our Church Resources and LifeWay Christian stores divisions, there is a constant flow of backorders. As soon as a new item hits the warehouse dock, our system tells us if it has backorders already in queue, and those items are ready to ship the day after we receive them. For example, if a book has been heavily promoted and placed on backorder, when several thousand copies land on the dock, we’ll give them a prime location on the picking floor.

Our goal is to have as many orders shipped in the same day as possible. Our fill rate is around 95%. The other 5% includes backorders and stockouts.

John Swartz, VP Operations
Conney Safety Products
Madison, WI

Forecasting is the key to avoiding backorders. Our first line of defense is to use past-demand history models to forecast our needs. We use the inventory management system by Infor (formerly Daly.commerce) to manage our 12,000 items. It uses forecasting modules and exception-based reporting to the buyers. The system matches forecasted demand with actual demand for the past 24 or 36 months of purchase history. It also trips order points and sets minimum orders.

To manage backorders, we intentionally give prevention of backorders a higher priority than inventory turns. This does drive some surplus stock to the shelves, but our value as a distributor is that we have products on the shelf ready-to-go. It’s a cost of doing business.

Our target for backorders by buyer on a line-item service level is 97.5%. Our target for the percentage of orders shipped complete on one day is 93%. Above 95%, the line-item investment goes up exponentially.

When we started direct importing last year, our lead times for those items were increased from two to four weeks to 12 weeks. This made it difficult to forecast demand for new items because we had to place orders for replacement items before the first shipment arrived. We also had to keep safety stock on hand.

Brad Grimsley, VP Fulfillment
South Whitley, IN

To reduce backorders, it’s important to have the best forecast possible, pay close attention to sales and velocities so you can catch them when they start to take off, and be proactive with your customers. We make real-time inventory status available to our customer service representatives and offer substitutions to customers when the item they order is out of stock. Overall, our fill rate is 92%. Of the backorders that we take, we extend backorders less than 10% of the time.

In our school business, we have a fairly good selling history that we can use to predict future sales. We also offer discounts to encourage customers to buy early so that we can get an idea of which items might be popular that year.

Since we manufacture some items in-house, we can make these items to order and don’t have to get committed deeply into stock. Also, roughly 80% of our products are made by domestic vendors, so our lead times are relatively short. In other cases, if an item is relatively small, has a relatively low-cost value, or [low] purchase cost to acquire, we may go deep into that inventory.

When we receive backordered items, our system gives them a “fast pass” through our fulfillment operations, usually within a few hours of receipt. We also run an order pull late in the afternoon, to catch expedited runs and back-orders which arrived that day. We use a “quick pick” line to pick items from skids or cartons and pack them for shipment.

Paul Angelos, Director of Planning
Restoration Hardware
Corte Madera, CA

We purchase within required lead times and make sure the inventory is in stock before the mail date. If a best-selling item starts the season on backorder, it is very hard to recover. We quickly identify top-selling items and expedite reorders if it is financially feasible. We also work to balance inventory needs between the direct and retail channels with a priority on filling backorders.

To improve forecasting accuracy, we have implemented the IFSO (Forerunner Systems) forecasting program, which allows for statistics-based forecasting, purchase flow optimization, and standardized inventory reporting. We have also strategically increased inventory coverage in longer lead-time categories, which has measurably improved in-stock and customer satisfaction and reduced backorders. The reduced backorder and customer contact costs help to offset the increased inventory carrying costs.

Backordered products are identified prior to warehouse delivery, pulled directly from receiving, and shipped to the customer without going to bin stock. This allows for same-day receiving and shipping of backorders.

Sabrina Horne Del Franco is a freelance writer based in Milford, CT. She can be contacted at sabrinadel@copper.net.

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