Positive cash flow, not profit & loss alone, determines the future of your stores and will have an influence on how profitable they are in the long term.
What is open to buy?
To contribute towards positive cash flow retailers need to keep a careful eye on inventory levels which is their largest expense. Open to buy planning is when a particular amount of money budgeted and made available for purchase orders. It is a tool which retailers use to control spending on merchandise and manage how much inventory is needed monthly to meet sales projections while preserving positive cash flow.
For example, if a retailer plans to do $12,000 in sales for April and their margins are 50%, then they will need $6,000 in inventory. If your current inventory is only $3,000, then you will need $3,000 open to buy - meaning $3,000 more in stock is required to make April’s sales projections. Open to buy planning is definitely helpful but retailers need a more comprehensive set of plans to thrive. In this post, we discuss some of the interdependencies between the processes of assortment planning and managing products in and out of a retail chain.
Open to buy planning is valuable but, like many things in retail, it should not be implemented in isolation. It forms part of inventory management, an essential function which is interdependent with assortment planning and space planning.
Here are two key areas where open to buy is interdependent:
Assortment Planning
Assortment planning, which is the selection of products which will go on offer during specific periods and locations (seasonality and location), is a critical component of category management for retailers.
From a practical perspective consider a buying team who is working from an open to buy plan which contains only the cash amounts that can be spent to meet targets for each category. An open to buy plan which does not include the actual products which make up the category is incomplete because it does not support execution of the assortment plan.
The process of managing inventory in and out of your business
When managing inventory into and out of your stores, there is more to consider, from a systems perspective, than what meets the eye. Just because an open to buy and assortment plan says budget exists for proposed transaction and the product is included in the assortment plan does not mean that everything has been considered.
To truly maximise efficiency, there are a string of events which need to take place when a product is bought into a retailer as is the case when a product has been discontinued and needs to be managed out of your business.
Below are three scenarios with questions to consider for each scenario:
A SKU is bought in on a once off basis
Buyers make one time deals with suppliers. Sometimes they do this to cater for annual events and holidays such as Christmas, Thanksgiving, Easter, etc. Other times it is because they managed to negotiate a special deal - I think we all know how good some buyers can be when it comes to negotiating good deals.
Questions to consider for this scenario:
- When this stock arrives how manual is the process of getting the product from your distribution centres to stores and in the correct quantities?
- How manual, timely and accurate is the process of adding this product to your planograms?
A SKU is bought in and will remain active for some time.
New products are often introduced with the intention of re-ordering before the product becomes sold out. Consider a supplier who has a new product and the appropriate buyer has agreed to introduce the product into the business on an ongoing basis.
Questions to consider for this scenario:
- How is the product re-ordered as stock levels run out?
- Is this process accurate, on time and automated?
A SKU is discontinued
In the same way, new products are ranged retailers also regularly decide that they no longer wish to stock certain products in their business for whatever reason.
Questions to consider for this scenario:
- How are discontinued products managed out of your business?
- Are discontinued products simply removed from shelves or is there a systematic process which eliminates stock waste?
Discontinued products should be marked as discontinued, remain on Planogram until all stock has been depleted from the Distribution centres (DC’s) as well as at least 80% of the stock held at store stockrooms. At this stage, the product should then be flagged for removal from planogram to make space for newly ranged products.
Conclusion
In this blog, we barely touched the surface. Hopefully, some of the concepts and questions which were covered have added perspective about what it takes to get the best products for your categories at the right times and in the right quantities and to display those products optimally without wastage.
You are going to need more than a simple open to buy plan - you are going to need an integrated set of systems to help you deliver on these demands more intelligently.
