Every retailer has sales and inventory plans, but how they interact is often misunderstood, or at least underappreciated. The solution is open-to-buy (OTB). By ignoring this critical tool, operations leaders risk mismanaging their most expensive asset, inventory. Here’s more about OTB and how to use this formula to ensure successful inventory management and budgeting for your business.
What is Open-To-Buy?
So, what is OTB? You’ve likely heard the phrase, but the specifics may still be a bit foggy. This post will introduce OTB, retail best practices and the power of merchandise planning technology. It will also take a look at the purpose of planning in a system like Toolio, which is to make sure the right product is in the right place at the right time at the right price. Let’s dig in.
Open-to-buy (OTB), then, is essentially a budget for future receipts contained to a point in time. While it should be used by nearly all retailers, it is especially important for multi-location or multi-channel retailers to ensure productive inventory across all locations and channels. When the calculation is done correctly, it will result in a solid budget for buyers or production teams to plan their incoming receipts.
It’s helpful to note that OTB can either be expressed in units, retail dollars or cost dollars, depending on your goals and needs. Furthermore, OTB is not a static tool; it requires actual numbers to roll in for the current window and future plans to be adjusted to trend to inform its accuracy. Open-to-Buy is also called a WSSI, or Weekly Sales, Stock and Intake report, which is the more commonly used terminology for this tool in the UK and Europe.
This is where Toolio can help greatly by feeding in actualized data. It can help you see whether you’re going to miss an inventory target due to a canceled item or end up over-inventoried because of a missed sales plan. Toolio’s automatic actualization of the data feeding in from your tech stack empowers you to quickly adjust sales and inventory plans to give you a more accurate picture of your OTB.
When to Conduct Open-to-Buy Budgeting
It’s important to note that OTB isn’t something you “set and forget.” Since it’s dependent upon accurate data, you must reassess it weekly while in-season. The best time to do this is when the prior week’s data has come in. This way, you can continue to adjust the numbers based on where your inventory and sales targets actually stand, giving you real-time insights that allow you to plan more effectively.
For example, you may have projected your sweater sales rather conservatively, expecting the winter chill to have died down by a certain date. But when a cold spell sets in, your data may reveal that your actual sales are outpacing your projections. This tells you what to reorder and what not to reorder - which in this case might be sandals or another hot-weather item. It also gives a clearer perspective into the best way to earmark the OTB budget that’s left.
When it comes to timing, lead times are also key to understanding the greater picture of OTB. Your lead time is how long it will take for a given product to be made and then moved (from its starting point to its final destination). In Toolio, you can put in your lead times based on your date and then automatically see the date by which you must place the order. This is very helpful in making sure your goods arrive on time.
The OTB Retail Formula
The formula for calculating an accurate OTB for a retail company is your receipts minus on-order commitments. For example, if you’re planning to receive 100 dresses and have 50 on-order commitments, your OTB would be 50. In other words, you’d still have 50 units that are open for buying. With this in mind, proper OTB planning requires the right timing, which also necessitates the right sequence. First come your sales targets, then your inventory plans. From there, you can calculate a receipt plan which drives your OTB. Here’s a deeper look at how this works.
OTB Budgeting Step-by-Step Guide
1. Determine the Right Sales Budget
Before you can calculate OTB, you must determine your sales plan. One major mistake companies make is setting sales targets without thinking about how to achieve those targets. For instance, they may say they want to reach $1.2 million in sales for the year since they reached $1 million the previous year. But, without understanding their inventory position to support such sales, they’re not set up properly to accomplish the goal.
This is why we recommend starting by setting sales AND inventory targets, remembering to consider the capacity of your stores and warehouse when doing so. Then, from your sales and inventory targets you will calculate your receipts. You want to have positive receipt plans each month to support the concept of freshness, since new receipts continually flowing in go a long way in keeping the customer excited.
There are other factors that can affect your receipts, like planned markdowns or which items you have on-hand versus on-order. But, what’s detailed above is the easiest, most straightforward way to get started calculating your sales plan and OTB. You can always get more nuanced later, as needed.
2. Use the Right Product
When you build your sales and inventory targets, it needs to be done on different levels of hierarchy (e.g. product, class, category, division). Getting granular like this will help you plan so you’re not over- or under-inventory in specific products. Instead of simply grouping items together under “sweaters,” for instance, you should break them down further into “cashmere sweaters,” “hoodie sweaters,” “sweater dresses” and so forth. This way, you can be more accurate with your open-to-buy by class or category and not end up with way too many items left (over-inventoried) or won’t run out of stock of another item (under-inventoried).
3. Factor in the Right Place
Location matters in retail, and therefore in your sales and inventory projects. When you’re planning your OTB, incorporate the region or individual store, website or brick-and-mortar shop and so forth. This can help you map out products needed in order to round out underperforming and over-performing categories.
For example, consider galoshes. If you plan for your inventory to be spread evenly among all your stores in every region, you’re going to end up with underperforming and over-performing stores. After all, customers in the Southwest have far less need for galoshes than those in the Northwest. So, plan around geography. Galoshes should be heavily stocked in the Northwest (and sales projections significantly higher) than they should in the Southwest. These factors must be taken into account in order to shape an accurate OTB.
4. Set the Right Price
As previously mentioned, you can create an OTB using units, retail dollars or cost dollars to hit certain targets. Oftentimes, when someone is managing physical stores, it makes sense to plan at the unit level since items will be taking up physical space in the stores. If you’re managing warehouses, conversely, it may not matter as much and could make more sense to plan based on dollars. There are also pre-built calculations in Toolio that can help you convert between units and dollars, which can save you a lot of time and frustration - and help you hit margin targets.
Another aspect of setting the right price is planning to strategically spend your OTB to take advantage of special buys from wholesalers, manufacturers, etc. At the same time, you also must make sure your OTB is filled by the time your lead time is up. Let’s say you have a 16-week lead time from most of your partners. If your OTB hasn’t been filled by about four months out, you will be scrambling to fill it (or else you may not be able to get the product anymore).
The value of OTB is extensive, but it doesn’t cover every type of planning. Refilling your stock of day-to-day basic products is not the best application for OTB, for instance. Staple items can be managed by using preset minimum and maximum inventory numbers, through an automatic replenishment program. It’s also important to note that OTB should be considered along with other metrics in order to be most useful (e.g. order cycle time, inventory carrying costs, etc.) and not treated as an island.
How Much Inventory Should I Have?
Your OTB calculation will help you figure out how much to buy but sometimes there are challenges that get in the way. One that happens rather frequently is when an organization makes the mistake of not revisiting their OTB, which can throw a wrench in its accuracy. If an order is canceled, for example, your OTB would be larger since you’d have more money to spend. So, you must take the actualized data into account to accurately manage your inventory.
Let’s say you're outpacing your sales projections for leggings. If you keep an eye on your actualized data, you’ll notice this and will need to re-trend the season since your sales plan wasn’t aggressive enough. Re-trending your season will then increase your receipts plan, which of course impacts your OTB. It’s all connected. Also remember that even if something is over-performing (like leggings), something else is probably underperforming. Maintaining an accurate OTB and the right inventory levels means you have to keep your eye on the real data and continually adjust accordingly.
OTB planning is essential to bridging the gap between your retail operations and planning. If you want to get better at OTB, check out our free template here.
Want to drastically improve at OTB? Sign up for a Toolio demo here and see firsthand how our data actualization and end-to-end planning can be a game-changer.