Open to Buy: What It Is, Benefits, and When to Use It
As a fashion brand, you sure understand why staying ahead of demand while minimizing costs is crucial. One powerful tool that you can leverage is the concept of “Open to Buy” (OTB). OTB planning is especially useful for businesses selling large numbers of SKUs like fashion and apparel brands.
In this blog post, we explore what OTB is, its benefits, and how you can implement it to streamline your inventory processes.
What is Open to Buy?
Open to Buy (OTB) is a financial planning tool used by retailers to manage inventory levels and control purchasing. It represents the amount of money a business has available to spend on new inventory after accounting for planned sales, existing stock, and current purchase orders.
Essentially, OTB acts as a budget for inventory purchasing, helping retailers decide how much stock to buy without exceeding financial limits or overstocking.
An OTB can be calculated in units or dollars, but is usually calculated in terms of cash, considering product cost variations. The OTB process determines the dollar amount available for inventory purchases within a set financial budget.
OTB helps retailers set and monitor their inventory budget to control purchasing decisions and avoid overstocking or shortages. Retail OTB is used by retail merchandise planners to manage inventory and sales forecasting across the entire business, ensuring financial accuracy and optimal stock levels. Determining desired stock levels is based on expected demand, supplier lead time, and available warehouse space.
Formula for Calculating OTB
The formula for calculating your store’s OTB is as follows:
OTB = (Planned Sales+Planned Inventory)−(Inventory on Hand+Purchase Orders)
- Planned Sales: The projected revenue from selling products over a specific period.
- Planned Inventory: The desired level of inventory at the end of a period, accounting for seasonality and trends.
- Inventory on Hand: The current stock available for sale.
- Purchase Orders: Orders already placed but not yet received.
Tracking end of month inventory or month inventory is crucial for accurate OTB planning and effective inventory management. The inventory level at different points in the month (beginning, end) is a key input for the open to buy formula, helping you forecast needs and maintain optimal stock levels.
The Benefits of Open to Buy in Inventory Management
1. Improved Budget Management
For inventory purchases, retailers can ensure they do not exceed their financial capabilities. This helps prevent overspending on stock, which can tie up valuable capital that could be used for other business needs.
Overstocking can tie up valuable capital and result in decreased profitability for retailers. With OTB, businesses can allocate their budgets more effectively across different product categories, ensuring that each segment receives the necessary investment to meet customer demand. Retail inventory budgets should be set in advance to account for shipping delays and merchandising needs
2. Enhanced Inventory Control
One of the primary benefits of OTB is better control over inventory levels. By closely monitoring stock and adjusting purchase plans based on actual sales and market trends, retailers can maintain optimal inventory levels. This reduces the risk of overstocking, which can lead to increased storage costs and potential markdowns, as well as the danger of stockouts, which can result in lost sales and dissatisfied customers.
Excess inventory can slow your cash flow and reduce profits, especially if you’re forced to mark items down. When products are out of stock, just 27% of shoppers return to purchase when available; most look for alternatives or skip the purchase. With OTB, businesses can strike the right balance, ensuring they have the right products in the right quantities at the right time.
3. Improved Cash Flow
Effective inventory management through OTB can significantly enhance cash flow. By aligning inventory purchases with expected sales and avoiding unnecessary stockpiling, retailers can free up capital that would otherwise be tied up in unsold inventory. This improved cash flow can be used for other important business activities such as marketing, expansion, or improving customer service. In essence, OTB helps businesses make more efficient use of their financial resources.
4. Increased Flexibility and Responsiveness
The retail market is dynamic, with trends and consumer preferences constantly changing. OTB provides retailers with the flexibility to adapt to these changes quickly. By regularly reviewing and adjusting OTB plans based on current market conditions and sales performance, businesses can respond more effectively to new trends and shifts in consumer demand.
Regular monitoring and adjustment of the open-to-buy plan is essential for maintaining effective inventory levels. This agility is crucial for staying competitive in the ever-evolving retail landscape.
5. Data-Driven Decision Making
OTB relies on accurate data and forecasting, encouraging retailers to base their purchasing decisions on solid evidence rather than intuition. By analyzing historical sales data, market trends, and consumer behavior, retailers can make more informed decisions about their inventory needs. Inventory turnover indicates efficient inventory management and helps predict future inventory needs.
Historical sales data, seasonal trends, and market shifts are analyzed in the OTB process to inform inventory decisions. This data-driven approach leads to more accurate forecasting, better inventory planning, and ultimately, more successful business outcomes.
6. Enhanced Supplier Relationships
By using OTB, retailers can plan their purchases more effectively and communicate their needs more clearly to suppliers. This can lead to better relationships with suppliers, as they appreciate the predictability and reliability that comes with well-planned orders. Strong supplier relationships can result in more favorable terms, faster delivery times, and better overall service, all of which contribute to a more efficient and effective supply chain.
Limitations of Open to Buy
Like any tool, OTB has its limitations, and they are as follows:
1. Resistance to Change
Adopting OTB often requires a shift in the way inventory management is approached within an organization. This change can be met with resistance from employees who are accustomed to traditional methods. Overcoming this resistance involves change management efforts, including training, clear communication of benefits, and sometimes a cultural shift within the company. Without buy-in from all stakeholders, the implementation of OTB can be challenging.
2. Data Integration and Quality
For OTB to function effectively, it requires accurate and comprehensive data from various sources, including sales, inventory levels, and purchase orders. Integrating this data can be challenging, especially if it comes from different systems that may not be compatible. Additionally, the quality of the data is crucial. Inaccurate, outdated, or incomplete data can compromise the effectiveness of OTB, leading to poor inventory decisions.
3. Rigidity in Dynamic Markets
While OTB provides a structured framework for inventory management, it can sometimes be too rigid in highly dynamic markets. Retail environments are often subject to rapid changes in consumer preferences, seasonal trends, and unforeseen events. OTB plans based on historical data might not always adapt quickly enough to these changes, resulting in missed opportunities or excess inventory. Retailers need to maintain a level of flexibility and be prepared to adjust OTB plans on the fly.
Monitoring and Adjusting the Plan
The success of any open to buy otb plan hinges on continuous monitoring and timely adjustments. Retailers must regularly review sales data, inventory turnover, and inventory levels to ensure their inventory balance aligns with actual customer demand. This ongoing process helps identify when inventory levels are drifting too high—leading to excess inventory and increased inventory carrying costs—or too low, which can result in lost sales and unsatisfied customers.
By closely tracking sales figures and key performance indicators, you can spot trends early and make informed decisions to adjust your OTB plan. This might mean increasing orders for fast-selling items or scaling back on products that aren’t meeting expectations. Proactive monitoring and adjustment not only help you avoid unnecessary costs but also ensure you always have enough inventory to meet demand, keeping your retail business competitive and profitable.
Best Practices for Open to Buy
To get the most out of your open to buy planning, it’s important to follow a set of best practices that ensure accuracy and adaptability. They are as follows:
1. Gather Accurate Data
Start by gathering accurate data on historical sales and current inventory levels—this forms the foundation of a reliable sales budget and inventory plan. Use this data to forecast sales projections and set inventory levels that reflect seasonality, market trends, and customer demand.
2. Review Your Plan Regularly
Regularly review and update your OTB plan to keep it aligned with your business goals and market conditions. Leveraging inventory planning tools, such as advanced inventory management software, can streamline the OTB planning process and improve the accuracy of your forecasts. By integrating these tools, you can automate data collection, track inventory in real time, and quickly respond to changes in demand.
3. Adjust and Update
Finally, always be prepared to adjust your OTB plan as new information becomes available. This flexibility helps you minimize excess inventory, reduce unnecessary costs, and ensure your inventory management strategy supports your overall business objectives. By following these best practices, you’ll be well-positioned to maximize sales, maintain optimal inventory levels, and drive long-term success for your retail business.
When Should You Use Open to Buy (OTB)?
1. Seasonal Inventory Planning
Retail businesses often experience fluctuations in demand due to seasonal changes. Whether it’s the holiday season, back-to-school period, or summer sales, having the right amount of inventory is crucial. Using OTB allows you to:
- Plan for increased inventory during peak seasons.
- Avoid overstocking after the season ends.
- Ensure you have the right products in stock to meet seasonal demand.
2. New Product Launches
When launching new products, it’s essential to balance enthusiasm with caution. OTB helps you:
- Allocate budget for new products without overcommitting.
- Monitor the performance of new items and adjust future orders based on sales data.
- Avoid tying up too much capital in unproven products.
3. Managing Promotions and Sales Events
Promotions and sales events can significantly impact inventory levels. OTB helps you prepare for these events by:
- Ensuring you have enough stock to meet the increased demand.
- Preventing over-purchasing that could lead to excess inventory post-event.
- Adjusting inventory levels based on promotional performance.
Conclusion
Open to Buy is an invaluable tool for retailers looking to optimize their inventory management. By implementing OTB, businesses can achieve better financial control, improved customer satisfaction, and a more agile response to market changes.
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