How to unlock store profits with ‘open to buy’

“In preparing for battle I have always found that plans are useless, but planning is indispensable.” – Dwight D. Eisenhower

If you’re looking for a business fitness New Year’s resolution, how about taking stock of the operational components of your business, in particular the management of your stock levels?

Even if you have already purchased stock, the way in which you command your inventory can win or lose the battle for customers as the lack of (or wrong) stock will see them disappearing to your competitors, sometimes never to return.

Commanding your inventory can be made easier by the implementation of good stock management systems (both computerised and manual) and a truly fit retail leader is disciplined in measuring sales, margin and stock position in both detail and composition.

One of the most effective product management systems is known as Open to Buy (OTB). Retail Doctor Group’s Fit for Business™ Diagnostics found that an average of 20% of retailers do not have an OTB forecast system, locking store profits where they could be opened to increased sales. Similarly, aged inventory is on average in-store 30-40% longer than the target dates nominated by management, again locking store profits where they could be unlocked to increase inventory productivity.

What is Open to Buy (OTB)?

Open to Buy is a merchandise budget, usually stated in retail dollars and frequently broken into key departments or categories. It is particularly useful for fashion and seasonal merchandise where specific SKUs (stock-keeping units) may change but departments, classifications and sub-classifications remain relatively stable. It is also useful when you bring in inventories at the beginning of the selling season and need to manage them down to a pre-determined closing level by the selling season’s end.

The first stage is to have a buying plan:

An OTB begins with a monthly or weekly sales plan. Once you develop a sales plan, ending inventories need to be planned. You are simply asking, “How much inventory do I need at the end of each month to support the next month’s sales as well as maintain effective merchandise displays?”

Once you’ve planned sales and inventory, you can arrive at an inventory receipt plan. At this point you’re questioning, “How much inventory do I need to bring in to cover my sales, markdowns and adjustments, given my planned inventory at the start, in order to end up with my planned inventory at the end?”

The OTB is the planned inventory receipts for that month, less the current purchase commitments. For future months, especially for future seasons, it quantifies any remaining available OTB for that specific month.

Once the plan is in place

A well-structured OTB presents both the plan and actual results, allowing you to track progress as the season itself progresses. The OTB, through any given month, is the planned ending inventory less the projected actual ending inventory. For future months, it identifies whether additional inventory is needed or whether too much inventory has already been committed to:

• Within a season, OTB gives you the information necessary to make decisions regarding what to reorder.
• OTB gives you the information necessary to ensure that ending inventory levels don’t exceed plan and tie up your cash flow.

Winston Churchill once said, “However beautiful the strategy, you should occasionally look at the results.”  The fittest retail plans are based on an understanding of historical and current statistics, as well as forecasting the future accordingly. Put all the right systems into place and you’ll unlock store profits with the right successful inventory.

We are pleased to invite you to join us at our next Fit for Business Breakfast event this March 11th and 12th in Sydney and Melbourne. Peter Birtles, CEO of Super Retail Group, together with Russell Zimmerman, executive director of Australian Retailers Association, and I will discuss marketplace challenges and opportunities for Australian retailers to build fitter and more innovative businesses in 2014 and beyond. For further information.