The holidays are over and you’re left with a surplus of outdated inventory. To preserve customer interest, you need to buy new merchandise and move out old stock. But with a high volume of ’08 merchandise, you don’t have enough open-to-buy dollars to purchase new products. As a result, you are forced to sell the dated merchandise on clearance, reducing your margins and putting profits at risk.
Hopefully this scenario doesn’t sound too familiar, but most retailers will encounter purchasing challenges throughout the year. Purchasing on a yearly basis is parlous; you risk under or overstocking. Open-to-Buy (OTB) software allows you to monitor inventory on a monthly basis, improving margins and cash flow, and ensuring a strong ROI.
What is Open-to-Buy (OTB)?
Simply put, open-to-buy is a budget tool that helps retailers manage inventory. Using the dollar as the standard unit of measure, an OTB budget reveals the difference between how much inventory you have available and how much you need to buy. The desired outcome is a leaner inventory and reduced markdowns, overstocks and understocks.
Developing an OTB budget begins with thoughtful planning. Retailers should first calculate average monthly sales (or weekly for seasonal businesses), then determine how much inventory is required to cover each month. Not only will this help establish a purchase plan, but will also form the basis of a cash flow plan.
Planning and maintaining an OTB budget can be done manually using spreadsheets or pen and paper. However, this can be cumbersome and ineffective for some businesses with large inventories, or those that rely heavily on seasonal buying patterns. OTB software simplifies this process by automating each activity, reducing manual calculations and monitoring stock levels. The benefits are improved profit margins, increased cash flow and greater ROI.
Open-to-Buy software is a valuable tool for retailers pursuing an open-to-buy purchasing strategy and budget. OTB software can be purchased individually as a stand-alone system or as a module within a retail management or point of sale software system. Additionally, OTB systems often integrate with popular point of sale systems, so it’s not necessary to replace your current point of sale software.
Implementing an OTB system is relatively painless and intuitive: first you create individual categories of inventory and determine your base numbers for a 12-month sales plan. In the 12-month projection, you can include estimated turn rates, delivery time and shelf life for each category. In turn, OTB software systems will automatically calculate ideal beginning inventory levels. At the end of each month, most programs will allow you to compare estimates against actual inventory levels and then develop an optimized buying plan.
In summary, developing an Open-to-Buy budget and buying plan not only helps improve your profitability, but also helps you run a more efficient retail operation. OTB software system take you one step further by automating the budgeting activities. Not only will software reduce your time spent manually entering data, but it will also help improve accuracy. If you aren’t already following an open-to-buy plan, now is a great time to start.