Wholesaler Backorders: What To Do | Chris Malta's EBiz Insider Podcast

Chris Malta's EBiz Insider Podcast

When you're selling online, whether you use drop shipping or you physically stock and ship your products, wholesale back orders from your supplier are always a real possibility.

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EPISODE TRANSCRIPT

When you're selling online, whether you use drop shipping or you physically stock and ship your products, wholesale back orders from your supplier are always a real possibility.

Of course, the exact same thing is true if you had a store in the physical world too. This is not just an online thing, but for our purposes, here, we'll talk about the online side of the issue.

Wholesale back orders often seemingly come out of nowhere and leave you holding the bag, trying to explain to your customer why you suddenly can't deliver what they bought to some degree or other. This is almost always the result of the butterfly effect where one small problem in the supply chain ripples out across the entire product market.

As a business owner, it's really important for you to understand why this happens and what you can do to avoid damage to your online reputation when it does. So, please bear with me as we go through how a hypothetical wholesale back order might occur.

Sometimes the reasons for these problems are simple, and sometimes they're more complex. I'm going to use a more complex example that touches on every aspect of the supply chain, because a supply chain is something you should understand as a business owner, especially over the last few years, when supply chain issues have become much more mainstream, then we'll talk about what to do about the problem.

Let's say you're selling coffee makers, the US based manufacturer of the coffee makers, orders different parts for those coffee makers from different specialized suppliers around the world, and then assembles those parts into the finished product in the US one day, somewhere in China, the machine that punches out the metal bands for the coffee pot handles breaks down, as happens with many companies in the largely unregulated manufacturing space in China.

It's a very small manufacturing company using a very old machine to punch out those metal bands. Let's say the breakdown is a crack in the pressure cylinder that drives the press, and the fix is really difficult. Parts for that machine are impossible to come by because this small Chinese company bought the 50 year old machine at a cheap price from a Russian surplus auction, and there aren't any replacements to be had.

The Chinese company can't manufacture the metal bands until they repair or replace the machine. They can't replace it because there aren't any cheap surplus presses to be had, and a newer machine is too expensive for this small manufacturing operation to buy. So the small Chinese company is down for three weeks while they remove the old cylinder and have a replacement specially made for it by an equipment fabricator in Thailand.

This one breakdown and repair delay sends a ripple effect across the entire supply chain.

For your coffee makers, the small Chinese company is operating on a very common three month lead time. That means the metal bands they make today, for example, don't arrive on a ship and get offloaded to a US Customs port for about three months. Because they have that lead time, the Chinese company decides not to notify the US based manufacturer that they have a problem.

They're afraid of losing their contract, so they keep the delay secret for as long as they can, while they scramble to fix the problem and hope to catch up in their quota in time. The US based manufacturer goes happily along assembling coffee makers with the parts they have from the delivery of 1000s of metal bands that just came in on the last shipment.

They're unaware that one critical part is about to be delayed because the Chinese company didn't tell the US company there'd BE a delay. So the US company doesn't go out and look for a replacement supplier of the metal band. The Chinese company gets their machine back up and running three weeks later and works overtime trying to make up for the time they were down, but it's impossible to catch up. The next order they send to the US company is going to be significantly short.

Months later, the next shipment of metal bands arrives at the US company's facility, and it's far fewer metal bands than it should be. The US company finds out what happened and is forced to reduce the number of coffee makers they assemble and ship to their wholesale suppliers around the country until they can get their next full shipment of metal bands for the coffee pots.

The US company doesn't want their wholesalers to go looking for other brands of coffee makers to sell in the short term, so they decide to delay telling their wholesalers about the upcoming shortage as long as possible, until they can come up with some kind of retention strategy that won't cost them any ill will with their wholesalers.

It takes them about a month to burn through their on hand factory inventory, and then they start to quietly notify their wholesalers that future shipments will be short for about three months or so. Your wholesaler of the coffee makers you sell only has a fairly small quantity of those coffee makers in stock because they're trying to manage their cash flow as carefully as possible.

They don't bother to make a general announcement that the coffee makers will be in short supply for a while, because they don't want to lose retailers. They decide to deal with their retailers on a case by case basis, offering discounts on other products in order to retain their retailers while they wait for their supply of that coffee maker to be fully available again.

So seven months after the initial Equipment Breakdown at the Chinese metal band maker, you sell a coffee maker to one of your customers on your website, and you place the order with your wholesaler, only to find out that the coffee maker is out of stock.

This is an example of poor supply chain management, specifically regarding the transmission of information throughout the supply chain, but however it happens, you now have a customer that you can't fill an order for, so you get mad at your wholesaler for not telling you their stock was running out.

You'd be right.

The wholesaler could and should have notified its retailers of the problem. However, the delay itself isn't the wholesaler's fault. The fault lies with a cracked pressure cylinder somewhere in China and a couple of poor management decisions by other companies in the supply chain.

The Chinese manufacturer could have told the US company there'd be a delay, and the US company might have found a substitution for the metal bands, but that Chinese company was afraid of losing that large contract if the temporary replacement supplier did a better job.

The US company could have warned their wholesalers the delay was coming, but they didn't want their wholesalers shopping for other coffee maker brands from other companies in the short term, or causing a drop in sales by making those kinds of announcements.

The wholesaler could have warned their retailers the stock would be low to non existent for a while, but they didn't want to look bad to their retailers, and decided to ride that out on a case by case basis. They also could have looked for other brands of coffee makers to carry, but for a wholesaler that can be a months long, very costly process.

These are the kinds of things you need to understand and be prepared for. When you're in business, one of your primary jobs is to put out fires. They'll spring up in the strangest places for reasons that are often a complete mystery. But the business owner who reacts well to situations like this is a business owner who succeeds in business.

Simply remember that every problem is an opportunity. That's an old saying, but it's an old saying for a reason. It's true, and it stood the test of time.

In the situation described here, for example, what do you do to turn that problem into an opportunity? Let's look at it step by step.

One: As soon as you find out that product is out of stock, mark it out of stock on your website. Don't remove the page because you don't want to lose whatever search engine ranking authority that page has already built up.

Two: Try to make the back ordered customer or customers happy. See if you can buy that same product from another website that might still have it in stock, or perhaps a big box store that still has some in their inventory.

Three: If you can buy it and have it shipped to your customer, make sure you let your customer know what you did for them. The trust and goodwill that comes from that simple act far outweighs the few dollars you might have to spend to buy the product elsewhere and send it to your customer to fill the order.

Four: If you can't get the product elsewhere, contact your customer immediately let them know the product is out of stock and offer them a choice, a similar replacement product at a discount or an immediate refund.

Your immediate and effective response to your customer turns a negative into a positive every time. People will respect and trust a business that takes care of them the best they can.

It's very important to understand that supply chains are complex and can be volatile, but the better you understand how they work and how to deal with the problems that arise, the more efficient and successful your business will be.

So put my 30 plus years of E commerce experience to work for you. Check out my Free EBiz Insider Video Series at ChrisMalta.com.

Thanks for listening, and I'll catch you next time.