Open-To-Buy Planning for Retailers

How to Control Your Retail Inventory

Pharmacist checking inventory
Andy Sotiriou/ Stone/ Getty Images

Open-To-Buy Definition

Open-To-Buy (OTB) is merchandise budgeted for purchase by a retail store during a certain time period that has not yet been ordered. In other words, how much inventory can I buy without getting myself in trouble. It is also the process of planning merchandise sales and purchases.

Open-To-Buy Planning

Good inventory control is critical to ensuring an adequate level of stock is on hand for the amount of sales being generated.

Having too much inventory (or the wrong type) during certain periods can slow your cash flow and reduce profits with too many markdowns. On the other hand, if you under-buy (meaning buy too little product) and miss sales opportunities, then you are not making your potential profit (plus damaging the customer experience). A retailer can be sure to stock the right amount of the right products at the right time by using an Open-To-Buy (OTB) plan. 

Open-To-Buy can be calculated in either units or dollars. However, it's best to use dollars since there are significant variations in costs between products. OTB is essentially the difference between how much inventory is needed and how much is actually available. This includes physical inventory on hand, in transit and any outstanding orders.

In order to take advantage of special buys or to add new products, some of the OTB dollars should be held back.

This also allows the retailer to react to fast-selling items and quickly restock shelves. In my stores, I used to reserve 10 percent of my OTB for closeouts or special buys from a vendor. There were always products that I knew would not be reordered, but would add some color or a "pop" to the store or in some cases an extra special value in price.

Consider maintaining an OTB plan for your business as a whole, but also plan for each category of merchandise you stock. The plan can be maintained on paper, in a spreadsheet or by purchasing one of the several retail software packages available that contain Open-To-Buy programs.

The Open-To-Buy Formula

Planned Sales
+ Planned Markdowns
+ Planned End of Month Inventory
- Planned Beginning of Month Inventory
----------------------------------------
= Open-To-Buy (retail)

For example, a retailer has an inventory level of $150,000 on July 1st and planned $152,000 End of Month inventory for July 31st. The planned sales for the store are $48,000 with $750 in planned markdowns. Therefore, the retailer has $50,750 Open-To-Buy at retail.

Note: Multiply that number by the initial markup to reach the OTB at cost. If our markup is 40 percent, then our Open-To-Buy at cost is $20,300. This initial markup is also known as IMU. Here is a great article to help you with that calculation

Before placing your Open-to-Buy plan into operation, ask yourself if each number is realistic. Does it make sense for the way you do business? Keep in mind that many of the figures on your inventory plan are only guidelines.

A good rule of thumb is if your actual ending inventory is within five percent of your plan, you are doing very well.

Another consideration here is inventory turnover. Going back to what we said before where too little product can cause you to miss sales and too much product can cause you to eat up your cash, the way we measure that is through inventory turnover. Here is a great article explaining this formula

Sample 6 Month Plan

6-Month OTB PlanJuneJulyAugustSeptemberOctoberNovember
Beginning Of Month Inventory $155,000150,000152,000157,000157,000165,000
Sales47,00048,00050,00050,00052,00048,000
Markdowns1,000750750100015001000
Open-To-Buy43,00050,75055,75051,00061,50037,000
End of Month Inventory $150,000152,000157,000157,000165,000153,000

 

Every year, many retailers have to close their doors because they did not manage their inventory well.

One of the biggest contributing factors to mismanagement is a lack of an open to buy system in the store. It doesn't have to be complicated and many POS systems will actually help you with this. Bottom line, start some type of OTB plan today. Use the simple plan illustrated in the chart above and you will be well on your way to retail health.