Backorders Have Always Been With Us

Jun 01, 2003 9:30 PM  By

BACK IN THE DAY, as people say nowadays, initial order fill rates, defined as “the percentage of customer orders shipped complete in less than three days” were considered above average at 70%-80% for “fashion apparel,” 85%-95% for gifts and housewares, and 95%-98% for business supplies. Catalogs with 20% backorder rates were not uncommon as recently as 1995, according to Curt Barry’s article on being out of stock from the May/June issue of O+F that year.

It’s still true that backorders take a serious toll on customer goodwill and bottom-line results. Customers waiting for backordered goods are notoriously prone to tie up phone lines and clog e-mail conduits trying to find out the status of their orders, thereby increasing the company’s processing costs — to say nothing of the potential loss of goodwill among customers affected. Backorders in 1995, as now, produce a high rate of order cancellations, the worst of all possible worlds, in which the time and money a company spends on an order are all lost. The article warns that backorders can “depress rates for remails by one-third.”

Backorder Costs
CSR and phone costs $0.87
Pick/pack/ship labor costs 0.58
Freight-out 3.50
Packing and shipping supplies 1.05
Backorder notification costs 0.50
Cancellation — CSR and phone line costs 0.87
Costs not included:
Prospecting costs ?
Merchandising costs ?
Administrative (overhead) costs ?
Costs for returns ?
Lost margin opportunities ?
Added freight-in costs ?
Total cost of backordered item $7.37
x number of backordered items 40,000
TOTAL COST OF BACKORDERS $294,800+
Source: O+F May/June 1995

Although the figures for costs and percentages may have changed, thanks to the maturation of DTC fulfillment techniques and to technology, the basic advice offered by the article remains evergreen. Companies should analyze merchandising statistics and address obvious problems; improve forecasting accuracy; develop strong vendor relationships; make sure to balance inventory management and merchandising personnel; and develop systems to aid rebuying.

A PERFECT 10

You’re a direct-to-customer merchant, and you need to optimize vendor relations. Take a survey! Here’s a tried-and-true checklist, courtesy of O+F 1995, for improving relationships with vendors.

  • Quality orientation of management: Find out how vendors handle quality assurance and what levels of management are involved in quality assurance programs.

  • Availability of manufacturing process specifications: Learn how a vendor documents product specifications and related process capabilities.

  • Raw materials quality control procedures: Look further back in the supply chain to see how your vendors manage quality with their own suppliers.

  • Quality improvement systems: Encourage vendors and their suppliers to institute processes that lead to continuous quality improvement if they haven’t already.

  • The customer’s role in product development and quality engineering: Assess vendors’ willingness to let customers participate in tweaking or innovating standard designs.

Vendor Quality Control

Make vendor inspection information more visible with a vendor quality performance status board. The board will remind QA inspectors of vendor quality levels, but more important, it puts visiting vendors on notice that you are paying attention. Buyers should always include the vendor status board as a stop on vendor orientation tours. On a large cork board, post a list of your vendors. The list should be printed in big, bold letters so that it can be read easily from a distance. With color-coded pins, designate the status of your vendors based on the information from the receiving inspection.

Source: O+F May/June 1995

RATING SYSTEM
GREEN Eight or more shipments received within a 12-month period with no rejected units
YELLOW One to three shipments containing rejected units of the ten most recent shipments received
RED Two or more shipments containing rejected units of the five most recent shipments received
BLUE New vendors without sufficient histories to rate meaningfully