Without an understanding of what merchandise is coming into your store and what is going out, you’ll soon find yourself losing control of your store. Too much stock, too little stock, and unhappy customers are just a few of the consequences of letting it get out of hand. And then there is the fact that you’re losing money and sales opportunities.
Fortunately, this can all be corrected quickly but only if you take heed and start planning.
What is Open To Buy?
From certain angles, you can argue that Open To Buy sounds complex. After all, it involves numbers and calculations and all sorts of projections that can quickly go wrong. However, if you look at it from a different perspective, it’s not that difficult to understand.
At its core, Open To Buy is defined as a retail inventory management tool that allows you to figure out how much inventory you need to purchase initially and on a monthly basis to meet your sales projections.
Another way of explaining it is to say it’s a financial budget to help you figure out how much merchandise you can buy without getting into trouble. It’s also structured specifically to address the needs of retailers and is designed to help them with their inventory management.
That’s not to say that retailers only need an Open To Buy plan to be successful. We’ve written about that precise topic before. While it’s certainly valuable, it shouldn’t be implemented in isolation. However, it can go a long way to helping you ensure the overall health of your retail business.
Steps to creating an Open To Buy plan
When setting out to create your Open To Buy plan, there are a couple of steps that you need to consider.
The planning process begins with building your sales plan.
It’s also viewed by many as one of, if not, the most critical decisions any retailer must make. After all, not only will it affect your Open To Buy plan but it will also have an impact on your overall business.
When setting this up, a retailer needs to ask themselves, ‘How much am I likely to sell this month given the amount of stock I have for this month?’
After your sales plan is in place, it’s time to sort out your inventory plan.
At this stage, the question you need to ask yourself is this: ‘How much inventory do I need at the end of the month to support sales for the following month?’
Remember, you also need to factor in any markdowns into your Open To Buy plan and treat them as you would a sale, considering that they also result in a reduction in stock. If you fail to do so, it will affect how much merchandise you bring in and can ultimately leave you with too little or too much on the shelf.
Once you’ve factored any markdowns in as well as any other merchandise that has been transferred in or out or sent back to the vendor, it’s time to look at building your inventory receipt plan.
Essentially, it’s the month’s planned sales, plus the planned end of month inventory, plus your planned markdowns and inventory adjustments, minus the prior month’s planned ending inventory. It answers the question, ‘How much inventory do you need to cover everything, including your sales and markdowns in order to end up with your planned ended inventory?’
Just to note, while an Open To Buy can be prepared at many levels, it is most effective when prepared at a classification level. That is because sales planning, as well as forecasting, needs to be done at this level rather than by brand.
Understanding why you need an Open To Buy plan
While you may have the steps to create an Open To Buy plan, it won’t mean much if you don’t understand why you need to implement a plan. After all, without answering the ‘Why’, there isn’t any motivation.
The answer to the ‘Why’ question in the case of Open To Buy comes in the form of the benefits that arise from creating a plan. These include:
- You’re able to estimate how much money you need to invest in inventory from month to month.
- You can keep a fresh flow of merchandise coming in, which will mean your customers will keep coming back.
- You’re able to restrict your merchandise commitments so that you don’t get too much new merchandise too quickly.
- You can have an adequate amount of stock on hand, which will support your planned sales
- You’re able to pinpoint those areas of your plan that needs to be strengthened to maximise your output.
Without such a plan in place, your store runs the risk of mismanaging its inventory, which can ultimately affect the overall health of your business. In fact, manage it poorly for an extended period of time and you may even have to close down.
It does need to be said that following an Open To Buy plan does not guarantee success. After all, while it might help you answer the question of how much stock you should buy, it doesn’t help you to determine what specifically to buy. Nonetheless, with a well-formulated Open To Buy plan in place, you can increase your sales, reduce your markdowns, and above all, manage your inventory levels.