How can I pick and ship a substitute item when there is no stock of the ordered item

We have many items that are interchangeable, due to variants of colour, size etc. and they are all shippable and not used in WIP assembly. 

I can set up the item substitution but it seems to have no effect when I come to picking and shipping.  If there is no stock of the item on the order it just goes to backorder when there is plenty of stok of the substitute.

I can't find anything on Metalink regarding substitutions and picking/shipping.  Does the functionality exist?  Am I missing something in the set up?

If it does exist are there any restrictions on substitute items e.g can a non IB trackable item be a substitute for an IB trackable item, lot controlled for an non-lot controlled