Having an Open-to-buy plan allows the retailer to invest in the right kind of inventory, in the right quantities, at the right price, and have it delivered at the right time!
Having enough stock on hand to meet the demands of your customers increases your sales but it also increases your customer loyalty. Being known as the trusted, “go-to” source for your customers is key to success.
Inventory is our biggest asset! Having too much on hand can tie up our cash. Having too little on hand can make a retailer look like they are going out of business, and negatively affect sales. A healthy cash flow is crucial for all business owners. If your cash is tied up in unsold inventory you miss out on opportunities to reinvest in your business with higher depend inventory, growth opportunities, or simply to pay your bills.
An Open to Buy (OTB) plan provides you with a road map to follow to keep your cash flow positive and your customers coming to more often to see what is new.
Other benefits of an OTB plan include
- Less overspending
- Fewer markdowns
- Allowances for discovery of new inventory opportunities
- Ability to capitalize on trends to make more profit
- Healthy stock levels to reduce aged inventory
What is an Open To Buy Plan (OTB)?
Open to buy definition: a financial budget for retail merchandise planners.
- OTB is a purchasing plan based off your current inventory levels, projected sales, discounts and pre-determined time period.
Who uses an open to buy plan: OTB is used by all types or retailers, big and small! OTB plans can be used for the entire store or broken down into seasons, inventory classifications, departments, or even by vendors.
Why use open to buy plan: Data and forecasting are far more accurate to operate on compared to a hunch. You might get your inventory buying right in one or two seasons, but gut instinct is risky, especially when you have data to guide you with an OTB plan. When dealing with as much cash and risk as we do in retail, an OTB is far more comforting to rely on in order to meet the needs of your customer.
OTB definitions of terms used in the OTB formula:
- Planned beginning of month inventory: (BOM) How much retail inventory (in dollars) you expect to have at the beginning of the month.
- Planned sales: How much retail sales (in dollars) you forecast during a given month.
- Planned markdowns: A projection of markdowns you plan to take (in dollars).
- Planned open-to-buy dollars: The dollar amount that you have available to buy more inventory at the end of the month.
- Planned end-of-month inventory: (EOM) A forecast of balance inventory (in dollars) at the end of the month. End-of-month inventory carries over to become the beginning-of-month inventory for the next month.
How do you calculate an Open-to-buy formula?
| Sales Goal @ retail | Planned Markdown @retail + | EOM Inv. @retail + | BOM Inv. @retail – | On Order @retail – | OTB @retail = |
Open to buy is the difference between where you expect to end a sales period and where you started Example End of Month (EOM) and Beginning of Month (BOG) . The end of your sales period is your closing inventory plus your planned sales and markdowns.
What is included in “On hand Inventory” – this includes all your on-hand stock including warehouse or distribution center. Do you measure based on retail or cost: We prefer analyzing in retail dollars. Some retailers will analyze by units. We suggest being consistent.
Tracking Your OTB Plan on Hubventory
Boutique Hub Members have access to the Open to Buy Budgeting feature on Hubventory!
With this feature, members can create budgets for different product categories and even market purchases, and keep track of their investments to ensure they are buying smart.
Once you place an order on Hubventory, we will automatically take that amount out of the corresponding category on your budget.
Access the Open to Buy Budgeting tool on Hubventory by clicking on “My Account” on the top right corner, and then “Budget Planning”. From there, you’ll be able to set budget goals and track your investments for each month.
Rules for Creating a Successful Open to Buy Plan
1. Align OTB with Business Goals
- Understand Sales Targets: Your OTB plan should reflect your sales goals, ensuring you have enough inventory to meet demand without overstocking.
- Support Strategic Objectives: Consider the broader goals of your business, such as entering new markets, expanding product lines, or maintaining a specific inventory turnover rate.
2. Regularly Update and Review the Plan
- Continuous Monitoring: Update your OTB plan regularly (weekly, monthly) to reflect current sales trends, market conditions, and inventory levels.
- Flexibility: Be prepared to adjust the plan based on sales performance, changes in consumer demand, or unexpected external factors.
3. Accurate Sales Forecasting
- Use Historical Data: Base your sales forecasts on historical data, considering seasonal trends, economic conditions, and promotions.
- Account for External Factors: Consider market trends, competition, and economic factors that might affect sales and inventory needs.
4. Consider Lead Times and Order Cycles
- Plan for Lead Times: Take into account the time it takes for orders to be delivered and stocked. Ensure your OTB plan accounts for these delays.
- Manage Order Cycles: Align your OTB plan with your buying cycles to ensure timely replenishment of inventory.
5. Balance Inventory Turnover and Stock Levels
- Maintain Optimal Turnover: Strive for an inventory turnover rate that aligns with your industry standards and business model. High turnover reduces the risk of excess stock and markdowns.
- Avoid Overstocking: Ensure your OTB plan prevents excessive inventory that could lead to markdowns or obsolescence.
6. Include All Inventory Costs
- Consider All Costs: Include costs such as freight, handling, and duties in your OTB plan to get a complete picture of your budget.
- Monitor Gross Margin: Ensure that your OTB plan supports your desired gross margin by considering the cost of goods and planned markdowns.
7. Segment OTB by Category or Department
- Detailed Planning: Break down your OTB plan by categories, departments, or product lines to allocate budget more precisely and manage inventory more effectively.
- Focus on Key Categories: Prioritize high-margin or high-demand categories within your OTB plan to optimize profitability.
8. Use OTB as a Buying Guide
- Stick to the Plan: Use the OTB plan as a strict guide for purchasing decisions. Avoid impulse buys or over-purchasing beyond the OTB limits.
- Monitor Purchase Orders: Keep a close eye on open purchase orders to ensure they align with the OTB plan.
9. Incorporate a Safety Stock
- Buffer for Variability: Include a safety stock in your OTB calculations to cover unexpected spikes in demand or delays in supply.
10. Communicate and Collaborate
- Cross-Department Collaboration: Ensure that your OTB plan is communicated across departments, especially with the buying, merchandising, and finance teams.
- Vendor Collaboration: Work closely with suppliers to negotiate terms that align with your OTB plan, such as flexible delivery schedules or favorable payment terms.
Retail is a relatively simple business to get into! However, every year retailers go out of business primarily because they do not properly manage their inventory. Running your business based off a hunch or a gut instinct is not sustainable. The bigger you get the bigger your problems and retail inventory issues can cost a company its business!
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