Open-to-Buy (OTB) planning is a critical process for retailers to ensure they have the right amount of inventory to meet customer demand and maintain healthy cash flow. Without proper OTB planning, retailers risk either running out of stock, resulting in lost sales and dissatisfied customers, or carrying excess inventory, leading to unnecessary expenses and a strain on cash flow. In this blog, we’ll cover everything retailers need to know to implement a successful OTB plan.
What is Open-to-Buy Planning?
OTB planning is a process that involves forecasting sales, setting merchandise plans, and allocating inventory purchases to ensure that retailers have the right amount of stock on hand to meet customer demand. The goal is to optimize inventory levels to maximize sales while minimizing both stockouts and excess inventory.
OTB planning is a continuous process that requires ongoing analysis and adjustments based on actual sales performance and market trends. The key is to strike the right balance between having enough inventory to meet customer demand without tying up too much cash in excess stock.
Steps to Implement Open-to-Buy Planning
Implementing an OTB plan involves several key steps, including:
- Forecast sales
First forecast sales for the upcoming period, usually a quarter or a year. Historical sales data, market trends, and other factors can help estimate how much inventory is needed to meet customer demand.
- Determine merchandise plans
Once sales forecasts are established, create merchandise plans that outline which products to buy, in what quantities, and at what times. This involves analyzing sales data to determine which products are selling well and which ones are underperforming.
- Calculate Open-to-Buy
With merchandise plans in place, next calculate the OTB budget, which is the amount of money available to spend on inventory. This is based on sales forecasts, current inventory levels, and planned markdowns.
- Allocate inventory purchases
Finally, allocate inventory purchases to different categories, products, and seasons based on merchandise plans and OTB budgets. This ensures that inventory purchases are aligned with customer demand and sales forecasts.
Benefits of Open-to-Buy Planning
Implementing an OTB plan offers several benefits, including:
- Improved cash flow
By optimizing inventory levels, retailers can improve their cash flow by reducing excess inventory and freeing up cash to reinvest in their business.
- Better inventory management
OTB planning allows retailers to manage their inventory more effectively by aligning inventory levels with customer demand and sales forecasts. This helps to prevent stockouts and overstocking, which can negatively impact sales and profitability.
- Increased sales
By having the right products in the right quantities, retailers can increase sales by meeting customer demand and avoiding stock outs.
- Reduced markdowns
Markdowns can be a significant expense for retailers, eating into profit margins and cash flow. OTB planning can help retailers minimize markdowns by purchasing the right amount of inventory and avoiding excess stock.
Common Open-to-Buy Planning Mistakes
While OTB planning offers significant benefits, there are several common mistakes that retailers can make when implementing an OTB plan. These include:
- Not updating sales forecasts
Sales forecasts are a critical component of OTB planning, and retailers must update them regularly based on actual sales performance and market trends. Failing to do so can lead to inaccurate inventory levels and missed sales opportunities.
- Overestimating inventory needs
Retailers must be careful not to overestimate their inventory needs, as this can lead to excess inventory and unnecessary expenses. Overestimating inventory needs can occur when
retailers are overly optimistic about sales forecasts, fail to consider current inventory levels, or make purchasing decisions based on emotional factors rather than data.
- Underestimating lead times
Lead times, or the amount of time it takes for inventory to arrive after it is ordered, are an important consideration in OTB planning. Retailers must account for lead times when making purchasing decisions to ensure that inventory arrives in time to meet customer demand.
- Failing to monitor inventory levels
OTB planning is an ongoing process that requires constant monitoring and adjustments based on actual sales performance. Retailers who fail to monitor inventory levels risk either running out of stock or carrying excess inventory, both of which can negatively impact sales and profitability.
Open-to-Buy Planning Tools
There are several tools that retailers can use to facilitate OTB planning, including:
- Inventory Management Software
Inventory management software can help retailers to track inventory levels, sales performance, and purchasing decisions in real-time. This allows retailers to make data-driven decisions about inventory management and purchasing.
- Sales Forecasting Tools
Sales forecasting tools use historical sales data and market trends to generate accurate sales forecasts. These tools can help retailers to make informed decisions about inventory levels and purchasing.
- Point-of-Sale Systems
Point-of-sale (POS) systems can provide real-time data on sales performance, inventory levels, and customer demand. This data can be used to inform OTB planning decisions and ensure that inventory levels are aligned with customer demand.
Open-to-Buy planning is a critical process for retailers to ensure that they have the right amount of inventory to meet customer demand and maintain healthy cash flow. By following the steps outlined in this guide and avoiding common mistakes, retailers can optimize inventory levels, increase sales, and reduce expenses. With the right tools and ongoing analysis, Open-to-Buy planning can be a powerful tool for retailers to achieve success in a competitive marketplace.
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About the author
Combining human centered AI with deep domain expertise, Algo’s analytics enriched supply chain intelligence platform helps suppliers and retailers plan, collaborate, simulate and execute a more efficient supply chain.