| In the world of retail, Open-To-Buy is quite a buzzword. | | | | month's sales (in some cases the ending inventory |
| Do a Google search on "Open-To-Buy" and over | | | | may need to support more than just one month of |
| 100,000 references come up, many that are for | | | | future sales), as well as maintain effective |
| consultants and software vendors offering | | | | merchandise displays?" |
| Open-To-Buy programs. Many small retail software | | | | From there, other things like inventory adjustments and |
| packages offer an Open-To-Buy module as an | | | | markdowns need to be planned. |
| add-on option. But there are few retail software | | | | Finally, from the plans that have been developed, an |
| packages that include an Open-To-Buy function as | | | | inventory receipt plan can be arrived at. For any given |
| part of the core package. As a result, many small | | | | period (month or week), the planned inventory receipts |
| retailers struggle to find some way to effectively | | | | is the planned ending inventory, plus the planned sales, |
| budget their merchandise dollars. Frequently when I'm | | | | markdowns and inventory adjustments, less the prior |
| talking with a potential client they'll ask, "Do you think I | | | | month's ending inventory. Stated another way, the |
| need an Open-To-Buy?" without really knowing | | | | planned inventory receipts answers the question, "How |
| exactly what an Open-To-Buy is. | | | | much inventory do I need to bring in to cover my sales, |
| So what exactly is an Open-To-Buy? | | | | markdowns and adjustments, given my planned |
| The clearest and simplest definition is that it is a | | | | beginning inventory, in order to end up with my planned |
| financial budget for retail merchandise. Let's look at this | | | | ending inventory?" |
| more closely. | | | | The inventory receipt plan serves several important |
| An Open-To-Buy relates directly to retail merchandise, | | | | functions. First, it serves as the inventory purchasing |
| is structured specifically to address the needs of | | | | plan for future months. While it doesn't tell you |
| retailers, and is a tool designed to assist retailers | | | | specifically what to buy, (you need an assortment plan |
| manage and replenish their most significant asset, their | | | | for that), it does tell you how much you need to by for |
| inventory investment. | | | | receipt in each month. Second, because inventory |
| An Open-To-Buy is a budget, and involves the full | | | | purchases are typically the most significant cash |
| range of budgetary functions. It begins with the planning | | | | outflow for a small retailer, the inventory purchasing |
| process, is future oriented, provides guidance on how | | | | plan serves as a critical input into a financial cash flow |
| much to buy, and provides benchmarks for evaluating | | | | plan. |
| progress, and adjusting future plans. | | | | The completed Open-To-Buy plan also enables a small |
| An Open-To-Buy is a financial tool, in that the units of | | | | retailer to evaluate, before the season starts, critical |
| measure are typically dollars, usually retail dollars but | | | | inventory productivity metric like inventory turnover and |
| sometimes cost dollars, and that it can be tied back to | | | | gross margin return on investment GMROI) (see |
| the financial control process. | | | | "Measuring Inventory Productivity"). These are critical |
| An Open-To-Buy can work on any level that a retailer | | | | measures of the productivity of the inventory |
| needs it to. It can be used to track merchandise at the | | | | investment, and evaluating the planned turnover and |
| company, department, classification or sub-classification | | | | GMROI allows the small retailer to pro-actively manage |
| level. In rare cases for a small retailer, it can even be | | | | these metrics for continual improvement. |
| used to track an individual item. | | | | In Season |
| Fashion and Seasonal Merchandise versus Basic | | | | A completed Open-To-Buy plan establishes the critical |
| In-Stock Items | | | | benchmarks for evaluating exactly where you are |
| It is important to note from the start, that as a | | | | once you get into the season. It's after the season |
| replenishment tool, an Open-To-Buy is not appropriate | | | | gets underway that an Open-To-Buy truly earns its |
| for all categories of merchandise. It is most appropriate | | | | keep. In season, key decisions have to be made about |
| for fashion merchandise where the specific items may | | | | what to reorder, what to back off on, and how to |
| change, but the departments, classifications and | | | | allocate any remaining Open-To-Buy dollars. |
| sub-classifications remain relatively stable, and | | | | A well structured Open-To-Buy will present both the |
| seasonal merchandise where inventories are brought | | | | plan and actual results, and allow management to track |
| in at the beginning of the selling season, and need to | | | | the progress as the season goes along. Actual sales |
| be managed down to pre-determined ending level at | | | | can be compared to planned sales, actual receipts to |
| the end of the selling season. | | | | planned receipts, actual ending inventories to planned |
| In the case of fashion or seasonal merchandise, an | | | | ending inventories, future open purchase order |
| Open-To-Buy answers the question of how much to | | | | quantities to planned receipts for each month. |
| buy, but not necessarily the question of which specific | | | | Like any good budget, an Open-To-Buy needs to have |
| items to buy. For that, a detailed assortment plan is | | | | a future orientation. It needs to be able to tell |
| necessary, which lays out exactly what items will be | | | | management how much inventory is needed in any |
| coming in when, and provides a plan for how all of the | | | | future month to make the sales and ending inventory |
| individual items come together to form a compelling | | | | plans, given the current purchase order commitments |
| merchandise assortment | | | | for that month. |
| In contrast, an Open-To Buy is not appropriate as a | | | | The open-to-buy through any given month is the |
| replenishment tool for day-in and day-out basics. | | | | planned ending inventory less the projected actual |
| These staple items are more effectively replenished | | | | ending inventory. For prior months it quantifies whether |
| using an automatic replenishment program running off | | | | the company was over-inventoried or |
| of pre-determined minimum and maximum inventory | | | | under-inventoried. For future months, it identifies through |
| parameters. In the case of these in-stock basics, an | | | | any given month whether additional inventory is |
| Open-To-Buy may still serve a valuable budget and | | | | needed or whether too much inventory has already |
| control function at a department or category level. | | | | been committed to. |
| Planning | | | | The open-to-buy within any given month is the planned |
| Like any budget, an Open-To-Buy starts with a plan, | | | | receipts for that month less the current purchase |
| then compares actual results to that plan and | | | | commitments. For prior months it measures the |
| quantifies any variances. Carefully considered planning | | | | efficiency of the buyers and vendors in providing |
| is the critical first step in constructing an Open-To-Buy. | | | | inventory as planned. For future months, especially for |
| The planning process begins with building a sales plan. | | | | future seasons, it quantifies any remaining available |
| For small retailers, most sales plans are broken out by | | | | open-to-buy for that specific month. |
| the month, although in some cases, especially highly | | | | Like any management tool, an Open-To-Buy is merely |
| seasonal businesses or categories, it may be more | | | | a tool to help a small retailer better manage their |
| appropriate to plan sales by the week. The question to | | | | inventory. It requires an initial investment in time and |
| ask is a very basic one: "What is the most likely level | | | | attention to build out a realistic plan, and diligence to |
| of sales from stock (excluding special orders) by | | | | maintain it as you go through the year or a season. But |
| month (or week)?" | | | | it can yield dramatic results quickly in most situations, |
| Once a sales plan has been developed, the next piece | | | | from increased sales to leaner inventories and |
| of the planning process is to build an inventory plan. | | | | reduced markdowns and overstocks. It's a tool that in |
| The question to ask is this: "How much inventory do I | | | | the hands of a fully committed small retailer can |
| need at the end of each month to support the next | | | | profoundly improve financial performance. |