Open-to-buy (OTB) is an inventory management system that works with your retail business. It's the amount of merchandise your retail store can buy during a certain time period. In other words, it helps determine the amount of inventory that you will need to purchase to meet customer demand while maintaining a positive cash flow.
Good inventory control is critical to ensuring an adequate level of stock is on hand for the number 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, you are not making your potential profit and are damaging the customer experience. A retailer can be sure to stock the proper amount of the right products at the right time by using an open-to-buy plan.
OTB can be calculated in either units or dollars. However, it's best to use dollars, as 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.
To take advantage of special buys or to add new products, some of the OTB dollars should be retained for future stock purchases. This also allows the retailer to react to fast-selling items and quickly restock shelves.
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 OTB programs.
The Open-to-Buy Formula
+ 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 1 and planned $152,000 end-of-month inventory for July 31. The planned sales for the store are $48,000 with $750 in planned markdowns. Therefore, the retailer has $50,750 OTB at retail.
Note: Multiply that number by the initial markup to reach the OTB at cost. If our markup is 40%, then our OTB at cost is $20,300. This initial markup is also known as IMU.
Before putting your OTB plan into operation, make sure each number is realistic and make sense for the way you do business. Keep in mind that many of the figures in your inventory plan are only guidelines. A guideline is that if your actual ending inventory is within 5% of your plan, you are doing very well.
Another consideration is inventory turnover. While too little product can mean missed sales, too much product can cause revenue loss. To assist with inventory management, inventory turnover is measured as follows:
Sample Six-Month Plan
|Six-Month OTB Plan||June||July||August||September||October||November|
|Beginning of Month Inventory $||155,000||150,000||152,000||157,000||157,000||165,000|
|End of Month Inventory $||150,000||152,000||157,000||157,000||165,000||153,000|
Every year, retailers go out of business primarily because their inventory is not properly managed. One of the biggest contributing factors to retail mismanagement is the lack of an OTB system. Use a simple plan as illustrated in the chart and you will be well on your way to retail health.