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 crutial 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 Open To Buy Plan (OTB) definition
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: The Boutique Boss Planner Inventory Tracking pages to track your own plan)
- 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.
You can easily use The Boutique Boss Planner Inventory Tracking pages to track your own plan!
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.
Four Rules for a Successful Open to Buy Plan
1. Quality forecasting begins with accurate data.
Be mindful of your daily processes to ensure that the data you are analyzing is accurate. (ie: use of purchase order information for intake, sales transactions, returns, and product tagging for classifications)
2. Understand that all OTB plans/forecasting needs to be nimble.
As volatile as the economy and the current market it, we should expect changes, especially from vendors. Have a list of options to fulfill orders from alternative sources if deliveries are delayed or canceled. Reviewing your OTB weekly will help you stay on top or issues or changes to your plan.
3. Review your OTB often to adjust for shifts in trends and opportunities.
When working with an OTB planner request a weekly or monthly forecasting meeting to have an un-emotional set of eyes on your business to help you stay focused and accountable.
4. Make sure everyone is on the same page
Having an OTB plan does you no good if you are the only one that if following it. Discuss the plan with your team so they understand what you have, what is coming in, and what our expectation is to turn inventory into cash. This information is important to not only the buyers, but the marketing team, the finance team, the sales team, and the merchandising team.
Where can you get the information for an OTB plan? (where does the data come from)
-We highly recommend a quality POINT OF SALE system or E-commerce platform. When Placing Orders for inventory from at Tradeshow, Hubventory, or from your vendor always make sure to record the following information from the Purchase Order: (Hubventory will automatically sync w/ your Shopify store saving you time and reducing risk of errors)
- Style Number
- Qty Received in each size(or other descriptor)
- PO Number
- Date Ordered
- Date Received
Once this information is entered into your POS or E-Commerce Platform you can generate the following reports to run your OTB: (for a current period of time)
- Inventory On hand
- Inventory On Order
- Inventory Received
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!
Management One is a Hub certified service provider. Management One is our go-to inventory management system for independent retail members. Our open-to-buy technology and hands-on expertise empower you to carry the right goods, in just the right amount, at exactly the right time. Click here to learn more.
We hope you liked this blog on How to Create an Open to Buy Plan. Follow along on Instagram for more content!