Good inventory control is critical to ensuring an adequate level of stock is on hand for the amount of sales being generated. Having too much inventory (or the wrong type) during certain periods can slow your cash flow and reduce profits with too many markdowns. On the other hand, if you under buy and miss sales opportunities then you are not making your potential profit. A retailer can be sure to stock the right amount of the right products at the right time by using an Open-To-Buy (OTB) plan.
Open-To-Buy can be calculated in either units or dollars. OTB is essentially the difference between how much inventory is needed and how much is actually available. This includes inventory on hand, in transit and any outstanding orders.
In order to take advantage of special buys or to add new products, some of the OTB dollars should be held back. This also allows the retailer to react to fast-selling items and quickly restock shelves.
Consider maintaining an OTB plan for your business as a whole, but also plan for each category of merchandise you stock. The plan can be maintained on paper, in a spreadsheet or by purchasing one of the several retail software packages available that contain Open-To-Buy programs.
The Open-To-Buy Formula
+ Planned Markdowns
+ Planned End of Month Inventory
- Planned Beginning of Month Inventory
= Open-To-Buy (retail)
For example, a retailer has an inventory level of $150,000 on July 1st and planned $152,000 End of Month inventory for July 31st. The planned sales for the store are $48,000 with $750 in planned markdowns. Therefore, the retailer has $50,750 Open-To-Buy at retail.
Note: Multiply that number by the initial markup to reach the OTB at cost. If our markup is 40%, then our Open-To-Buy at cost is $20,300.
Before placing your Open-to-Buy plan into operation, ask yourself if each number is realistic. Does it make sense for the way you do business? Keep in mind that many of the figures on your inventory plan are only guidelines. A good rule of thumb is if your actual ending inventory is within five percent of your plan, you are doing very well.
Sample 6 Month Plan
|6-Month OTB Plan||June||July||August||September||October||November|
|Beginning Of Month Inventory $||155,000||150,000||152,000||157,000||157,000||165,000|
|End of Month Inventory $||150,000||152,000||157,000||157,000||165,000||153,000|