This article is written by Sweta Singh.
The main question is Why do we need Open to buy?
In today’s retail business, most of the money is invested in inventory. Inventory that is the merchandise we want to sell to our customers. If we buy too much even if at the end of the year, we are profitable, we will not have cash why? Because that cash is stuck in inventory form.
On the other hand, if we buy too little at the end of the year again, we might not have much of the cash because we failed to provide the product to our customers and thus loss of opportunity, loss of sales and hence less cash. To make yourself safe from this unwanted crisis we need Open to Buy (OTB).
OTB is a tool that helps retailers to manage their most important asset which is the inventory investment. OTB is essential for all kinds of retailers no matter what their size is.
What is Open to Buy?
- Open to Buy is a simple budget that helps the buyer to understand how much money they must spend on inventory.
- In other words, OTB is the tool that helps Buyer to understand how much merchandise they need to buy for particular period of time.
- This budget or tool helps buying team to control and manage how much inventory is needed monthly or yearly to meet the sales projections while maintaining a positive cash flow.
Here it should be noted that OTB is not an accounting tool, it is a forecasting tool. Also, it is based on the anticipated sales and stock turnover which are two main driving forces for any retail business.
The formula for OTB Calculation:
(Sales + Ending Inventory – Beginning Inventory) = Purchases of OTB
The above formula forms the entire basis of open to buy planning. In that formula we only know two aspects i.e. sales and beginning inventory; beginning inventory is the inventory that is on hand, we don’t know what is the ending inventory. To find the ending inventory we have to know the inventory turnover. The formula to calculate the inventory turnover is as below:
Inventory Turnover=(Cost of goods sold or Net Sales)/(Average inventory)
In Season Inventory Management:
- Given the dynamic nature of the business actual sales might not be as planned sales budget.
- Unforeseen factors may throw merchandise plan for tails pin
- In season, key decisions have to be made about what to reorder, what to back off on and how to allocate any remaining Open-To-Buy dollars.
In the In Season OTB management as displayed in figure, first we calculate OTB or the intakes bases the inventory projected and sales and after we enter the in season using the actual sales and pattern we reforecast the OTB is calculated again and again the circle moves on.
Rolling OTB/WSSI (Weekly Sales Stock Intake Report):
This report is very useful in the world of retail, this is one of the most important tools available on the hand of buyer or planner. This rolling OTB is created on the month level or week level. It’s a merchandising tool which helps to calculate the current and future sales and stock. The concept or the template used in both month or week level is exactly the same, the only difference is in the week level template we go a step further and manage the business the sales and inventory at a week level.
In the month level we manage the inventory at the month level. This template becomes the foundation of the In season management. When I say in season management what I mean is, it is in report where we compare the forecasted number with the actual number and understand the variance.
Conclusion:
On a concluding note, inventory is the most important asset for any retailer. If you underbuy or buy too less then you might be at risk of losing the business because of miss of sales opportunity.
Similarly, if you overbuy, your store and warehouse will be overcrowded resulting in negative cash flow and negative profitability. The situation is dangerous for your physical resources, this can be managed by the concept of Open to Buy (OTB). This is not a complex formula; it can be achieved if you master it. The key for this is to keep the balance between the on-hand Inventory and Future Purchases. This balance allows you to respond to the descending trend in a timely fashion.
About the Author:
Sweta Singh has done B.Tech from GCETTS in Apparel Production and Management and completed postgraduate in fashion technology from NIFT, New Delhi, India. She is currently into Fashion Retail in Buying and Merchandising, taking care of the product from the development stage to sales monitoring. She is passionate about fashion technologies and new trends in the apparel industry.