When you’re new to retail planning, or maybe have been in retail operations (but not planning specifically), open-to-buy (OTB) can feel complicated. But, it’s one of the most proven ways to effectively plan and to keep your organization thriving. Here are a few of the main benefits you’ll experience if you take the time to understand OTB planning and get familiar with the tools that can help you handle it more successfully.
The Open-to-Buy Formula
First, it’s important to know how to calculate an accurate OTB. While the general equation is straightforward, you can make it more nuanced as you gain further knowledge and experience. When you’re just getting started, however, use the following simple approach: Receipts minus on-order commitments = OTB.
One more quick definition. Receipts = beginning inventory + sales - ending inventory
An Open-to-Buy in Retail Template
Although that’s the basics of “how,” we’ve also built a handy OTB Template you can use to manage these critical metrics. If you’re on the hunt for some motivation to put the time into downloading and using that handy template, here are some of the “why’s” behind OTB’s importance.
Benefit #1: Clear Buying Guidance
One of the most helpful aspects of establishing an accurate OTB is that it’s instructive. You don’t have to buy based on instinct or even informed guesses; you can buy with precision and clarity. Let’s say you’ve created your OTB plan with detailed categories (e.g. “high heels,” “sandals,” “galoshes,” “hiking boots” and “sneakers” rather than just an overarching “shoes” category). If you want to help refining what level of attributes to consider, we cover best practices and examples here.
As such, you’ll know how to adjust buying up and down based on each store’s sales and inventory plans instead of taking a shot in the dark. Your downtown San Francisco store will likely need to be stocked with more high heels, while your Colorado Springs store will likely need more hiking boots and sneakers.
Additionally, your open-to-buy planning can guide you in determining trends. Simply taking an educated guess about seasonal needs doesn’t mean you’ll have what you need on-hand when you need it. In fact, many retailers find that seasonal shopping often starts a lot earlier than one might logically expect. Planning and staying on top of your OTB ensures you’ll buy the right amounts at the right time.
Benefit #2: Helps You Stick to Your Budget
There’s nothing quite as stressful as busting your professional budget, and having to scramble or explain yourself to your management team. OTB calculations help you avoid this unpleasant situation by properly planning from the get-go. If you know that seasonal spikes are coming, for example, you’ll plan your sales projections higher and your inventory higher - which will impact your OTB. This will serve as the backbone of all you do, and set you up to stick to your budget.
Furthermore, your OTB can help you identify any excess in your budget. Since you’ll have a better grasp on managing your merchandise, you might find that you’ve traditionally overspent in one category. Once such a discovery is made, you can pull back funds from that category and invest them elsewhere. This keeps you allocating budget where it’s most needed, prevents unnecessary cash flow problems from arising and can even improve profitability.
Benefit #3: Improves Inventory Management
Finally, but perhaps most importantly, OTB retail helps you manage your inventory more smoothly and accurately. By knowing your sales projections and keeping your expected inventory fluctuations, you’re far less likely to get stuck with a surplus of product or - on the flip side - disappoint customers by running out of favorite items.
The frequency that effective OTB planning requires can also bring a lot of value to your business. Instead of managing goods on a quarterly or yearly basis, you’ll be in touch with sales and inventory monthly (or even weekly). As such, you’ll be operating based on information received in real-time, which gives you flexibility with inventory and better accuracy with forecasting.
Last, but not least, OTB planning helps your operations team. If your receipts are going to be especially high in a given month, they can staff up to plan for that so the process of receiving the goods into your warehouse or store isn’t stymied by limited resources. Everyone wins.
In Conclusion: OTB for Retail is Really, Really Important
OTB is an essential tool that retailers can use to buy better, handle their finances more efficiently, manage their inventory more seamlessly - and satisfy customers’ demands more predictably. If you want to skip to manual, Excel-based approach to OTB, check out Toolio’s merchandise planning software today.