Now that I have your attention, Open to Buy (OTB) is a planning tool to determine how much to spend on new inventory. The key to successful retailing is managing inventory. Open to Buy gives retailers budgetary numbers when they go on buying trips. One of the most common reasons retailers go out of business is that they overbuy leading to cash flow problems. OTB gives retailers an amount that they can spend based on projected sales. The best OTB plans I have seen are done by department. The formula for Open to Buy is
Planned Sales + Planned End of Month Inventory – Planned Beginning of the Month Inventory = Open to Buy, meaning the the amount you can spend.
Of course, it is hard to know what my Planned End of Month Inventory will be, but this is where the concept of Turns, covered in our There is a Season, Turn, Turn, Turn article comes in handy. If you know how often the items in a department turn, you can approximate the ending inventory by department based on projected sales for the month. Next up is the Beginning inventory, which should be an easy report to run out of your Point of Sale System. So let’s look at an example. I start this month with with $25,000 in inventory in my hat department. I plan to end the month with $22,000 in inventory. I expect my sales to be $10,000, so let’s do some math $10,000 + $22,000 = $32,000 – $25,000 = $7,000 that I can plan to spend on my hat department. Keep in mind that since sales are at retail, I have used retail for my inventory values as well. To determine the amount at cost, I apply the percentage that I mark up my product 50%, then the amount I can buy at cost is $3,500. Now they can be a lot more involved with Open to Buy plans. For example, if your business is very seasonable, you may need an OTB plan by Season. You also need to consider if you have to discount your product and what that does to your plan. There are a number of tools available if you Google Open to Buy, you can find tools you can buy or examples of plans you can create in Excel.
The entire idea is to have the exactly right product available at exactly the right time the customer is looking for it. Overbuy and you can end up needing to get rid of inventory for pennies on the dollar or buy too little and risk not have product on the shelves when customer come into the store and missing sales. That, my friends is the mystery of Retail.