Essential for every retailer

What is good merchandising all about? Well, to maintain the level of inventory that provides adequate assortments when sales are low and not excessively high assortments when sales pick up. This is where the Open-To-Buy (OTB) concept comes into play. It tells you how much inventory should be on hand at the beginning of any given month and how much new merchandise should be received during the month. An OTB system estimates in advance the amount of cash that will be required to be invested in inventory from month to month for the coming season. It also helps to ensure that an adequate amount of inventory will be on hand to support the level of planned sales.

As you are calculating how much merchandise you can receive based on inventory levels and sales for a period, every retailer needs to use OTB. The small retailer cannot afford any mistakes because his sales volume and cash flow are critical. The large retailer needs it due to his very size, which makes planning and control all the more critical. OTB planning will help retailers do a better job of buying which helps increase sales, reduce markdowns, increase gross profit. Mr. Jay Gupta, Managing Director - The Loot, shares: “OTB is the key to proper inventory planning. Projected demand against past sales and current market demand with a five month backup generally ads up to the OTB. OTB helps in planning the right product mix in the proper sizes as required at the front end”.

Why to adopt OTB?

OTB is a well fitted inventory strategy for chain stores in retail. Also, it can work well in a standalone store simultaneously. However, before implementing the strategy into retail business, one should assess its benefits first.

Optimising working capital requirement: Effective management of working capital can enable companies to free cash from their balance sheet and put it to more productive use in growing their business. OTB helps in delivering the product in stock, product requirement of a month by analyzing the sales percentage of previous week. It can give a clear picture of the working capital and thereby the saved capital can be used in other part of the business. 

Customisation of product assortment: OTB gives customized assortment of products. It happens with retail businesses that they offer products what they have in their stock but not what their customers want from them. Based on the customer preferences OTB can present a detail analysis of what their customer prefers to purchase and accordingly the retailer can keep those products on the shelves.

Cognizance of retail business environs: As OTB syncronises the demand and supply criteria in a retail store, it creates a harmonious retail business environment.

Adjusted as per sales and stock: OTB enhances the product assortment by reading the sales percentage and accordingly predicts to stock those products which are on high demand and on sales.

Increases bottomlines: To lure the customers, often retailers need to lower their price range of products. In other words, giving discounts to lure customers is not always profitable. OTB can enhance the bottomline of the business by lowering these markdown activities.

Calculating OTB

You can maintain an OTB plan for your whole business as well as for each category of the merchandise you stock. This also allows the retailer to react to fast-selling items and quickly restock shelves. The OTB plan can be maintained on paper, in a spreadsheet or by purchasing one of the several retail software packages available that contain OTB programmes. Your OTB can be prepared at the company level, store, department, classification or buyer level, or a combination of any of these. And it should be prepared on a monthly basis, which can be combined into a seasonal open-to-buy. However, for any business that is utilizing a point of sale software program, open-to-buy control can be a component of that software. Also there are other separate OTB software systems available.

If not software, the formula to manually calculate OTB is to deduct planned beginning of month inventory from the total of planned sales. The formula is: 

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

Retail Applications

The application of OTB plan across all retail categories is not accepted by all retail experts. Some feel the strategy is more viable for fashion merchandise and not for basic in stock items. Because, in fashion merchandise, OTB answers the question of how much to buy, but not necessarily the question of which specific items to buy. For that, a detailed assortment plan is necessary, which lays out exactly what items will be coming in when, and provides a plan for the individual items that come together to form a compelling merchandise assortment.

Also, it’s true that an OTB is not appropriate as a replenishment tool for day-in and day-out basics. These staple items are more effectively replenished using an automatic replenishment program running off pre-determined minimum and maximum inventory parameters. But, in the case of these in-stock basics, OTB may still serve a valuable budget and control function at a department or category level. Mr. Anshuman Singh, CEO, Future Logistics shares, “OTB fits well for any product category and can be customized as per the product supply chain and lead times, though it is more widely used for fashion and seasonal categories such as apparels, footwear, jewellery, giftware, sporting goods etc”.

With the growing competition and burgeoning consumer demands, it is imperative to conclude that OTB is not restricted to fashion retail only. Any retailer could, and should use an Open-to-Buy system in order to improve the bottomline.