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butterfly effect

Wholesale Backorders: The Butterfly Effect

When you’re selling online, whether you use Drop Shipping or you physically stock and ship your products, wholesale backorders from your supplier are always a real possibility.

Wholesale backorders 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.

So please bear with me as we go through a how a hypothetical "Butterfly Effect" wholesale backorder situation 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 every aspect of the Supply Chain, because a Supply Chain is something you should understand as a business owner.

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 assembles those parts into the finished product in the US.

One day, somewhere in China, the machine that punches out the metal bands that hold the handle on to the coffee pot that comes with the coffee makers you sell breaks down.

As with many companies in the largely unregulated manufacturing space in China, it’s a very small manufacturing company using a very old, complex machine to punch out those metal bands. The breakdown is a crack in the pressure cylinder that drives the press, and the fix is very 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 equipment dealer and there aren’t any replacement parts 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 are no more cheap surplus presses to be had, and a newer machine is too expensive for this small manufacturing operation to buy.

The small Chinese company is down for 3 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) 3 month lead time. That means that the metal bands they make today, for example, don’t arrive on a ship and get offloaded to a US Customs Port for about 3 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 a secret for as long as they can while they scramble to fix the problem.

The US-based manufacturer happily goes along assembling coffee makers with the parts they have from the delivery of thousands of metal bands that just came in on the last shipment, unaware that one critical part is about to be delayed.

Because the Chinese company didn’t tell the US company that there would be a delay, the US company doesn’t go out and look for a replacement supplier for the metal band.

The Chinese company gets their machine back up and running 3 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 coffeepots.

The US company doesn’t want their wholesalers to go looking for other brands of coffee makers to sell, so they decide to delay telling their wholesalers about the upcoming shortage as long as possible until they can come up with a 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 casually notify their wholesalers that future shipments will be short for about 3 months or so.

Your wholesaler of the coffee makers you sell only has a fairly small quantity of the 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.

Seven months after the initial equipment breakdown at the Chinese manufacturer of metal bands, you sell a coffee maker to one of your customers on your web site. You place the order with your wholesaler, only then to find out that the coffee maker is out of stock.

This is an example of poor Supply Chain management, specifically with regard to the transmission of information throughout the Supply Chain. However, it happens.

Now you have a customer that you can’t fill an order for, so you get mad at the wholesaler for not telling you their stock was running out. You’d be right; the wholesaler could have notified its retailers of the problem. However, the delay itself isn’t the wholesaler’s fault; the fault lies with that cracked pressure cylinder in China, and a couple of fear-based management decisions by other companies in the Supply Chain as well.

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

The US company could have warned their wholesalers that the delay was coming, but they didn’t want their wholesalers shopping for other coffee maker brands from other companies.

The wholesaler could have warned their retailers that stock would be low to non-existent for a while, but they too were afraid to lose customers in a tough economy and decided to ride it 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 process that gets very costly.
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 has stood the test of time.

In the situation describe above, for example; what do you do to turn that problem into an opportunity?

Let’s take it step by step:

1. 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 the page has already built up.

2. See if you can buy that same product from another web site; perhaps a big-box store that still has some in their inventory. 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 have to spend to buy the product elsewhere and send it to your customer.

3. If you can’t get the product anywhere else, contact your customer immediately. Let them know the product is out of stock. 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 trust and respect a business that takes care of them as a customer.

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.

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