Backorder Issues: The High Cost of Reduced Inventory

Heart of the Customer maps customer journeys for a wide range of B2B organizations, from healthcare to manufacturing to distribution and more. We’ve found one area of friction common across industries: backorder issues.

Whether mom and pop retail storefronts or global manufacturers, customers with products on backorder face similar situations. Here’s how it generally plays out:

  • They take an order from their customer and promise a delivery. Then they find out that the product is on backorder. That puts them in an difficult position. Do they scramble to find a new supplier? Look for an alternate product? Disappoint their customer?

None of those options are appealing.

Is it a coincidence that this issue arises so frequently, regardless of whether the backordered products are valued at $100 or $1 million? I don’t think so.

Growth is addictive. And when topline growth slows down, companies look for ways to improve the bottom line. One way is to restrict working capital. In other words, they reduce inventory. In addition, many industries are reeling from material shortages resulting from the COVID pandemic, and these shortages are expected to persist through at least 2021.

This has a significant and negative impact on customers.

Here are four ideas, from tactical to strategic, that can help you, as a CX leader, manage this problem and help your organization fully appreciate the cost and consequence of reduced inventory.

1. Provide proactive notice of backorders

This is a brute force technique, but if your inventory issues are restricted to just a few products, let clients know about it before they order, preventing disappointment and minimizing the frustration you cause to their customers.

Most suppliers are hesitant to do this. They prefer to delay notice until after the order is locked down, because they worry the customer won’t place the order at all if they know the product is on backorder.

That strategy might work out well if their clients are puppies with short memories. But if you’ve ever had to call a customer to renege on a promised delivery, you know that real customers have long memories. And such unwelcome surprises will cause them to look elsewhere.

2. Provide inventory transparency

Obviously this is more difficult than simply providing notice. That’s why good, clean data is so important. And sharing bad data with clients is even worse than sharing no data at all.

But if your data is solid, providing transparency to your inventory lets clients know about potential issues early on, so they can set appropriate expectations with their customers.

3. Prioritize customers

If every customer is special, no customer is special. Serving customers well requires trade-offs.

With constrained inventory, first-come-first-served is a terrible idea. Allocate inventory to your best customers first. Of course, you can’t do that until you’ve defined which customers are your “best” ones, a critical task for any B2B CX program.

4. Put a cost on backorders.

It’s easy to see the cost of higher inventory. Between cash flow, storage, and staff time, these costs are very tangible. It’s harder to show the benefit. And hard costs defeat fuzzy benefits every time.

It’s your job as a CX leader to show the impact, especially since it’s a customer impact. You’ll probably need help from your Operations partners, but it’s the best way to ensure your company fully considers the impact of reduced inventory. I can see three complementary ways to accomplish this:

i. Measure the cost of reacting to the issue

Customers don’t meekly accept backorders. If they need the product, they’ll work to get it. They’ll call CSRs, open complaints, and escalate to managers, while also reaching out to Sales for help.

One HoC client found their sales team had started “helping” with inventory issues. Soon, their customers expected Sales to get back to them within the hour and they stopped calling customer service. Sales spent much of their day tracking down orders rather than selling.

Another client found that their sales reps reacted to backorders by contacting every customer within 30 miles to find inventory they could borrow, then they drove to this other customer, picked up the supply and delivered it. This took hours.

Customer service is good – but was that the best use of their sales team’s time? I think not.

Tracking all this cost may be hard, so it might be more manageable to start with one market. Show both the hard costs of time and the opportunity costs from taking your sales reps away from their primary responsibilities.

ii. Measure lost customers

This can also be difficult, since it’s hard to identify one reason why clients are lost. Alternatively, look for lower share of wallet after backorder issues.

If you run win/loss studies, analyze them for inventory issues. One client found that, because of their issues, a customer prevented them from bidding on a $1 million opportunity. If you don’t have solid win/loss data, focus on anecdotal reporting.

iii. Put a face to the problem

This can be the most powerful approach, especially when paired with the other two. Supplement the data by showing the customer impact visually. Of course, journey mapping is a really good way to do this, especially when you video record the interviews.

We’ve captured our clients’ customers swearing and slamming the table when they talk about backorder issues. While you also need the data to show the problem rationally, nothing builds empathy and understanding – and most importantly, drives action – like seeing one of your most important clients frustrated because they can’t serve their customers.

Backorders are a big deal, particularly in B2B relationships. Sure, every company wants to limit costs. So it’s your job to balance the working capital analysis by showing the very real employee and customer impact of reducing inventory. Show that you’re losing more than you’re saving and you’ll get leadership’s attention.