22 MAY-JUN 09
Given the current state of retail a business acquaintance suggested recently that I write an article about open-to-buy (OTB) planning. My original reaction was “Who wants to read about that?” However a review of previous articles for Shoe Retailing Today shows that I have covered many things but open-to-buy. Since I work for a company that provides independent retailers with open-to-buy plans I guess it might be about time.
I am going to let you in on a trade secret: The formula for OTB is not difficult. Begin with planned sales determine the first-of-month inventory level factor in markdowns transfers and vendor returns add in merchandise receipts subtract what is on order and whamo! You have your OTB. Simple…or is it?
Let’s start with planned sales.
Where do they come from? Most independents get into trouble right out of the gate by getting this segment of the planning process wrong. A common albeit incorrect approach is to plan monthly sales volume based on last year. Using last year’s figures to project future sales is wrong on several levels.
What Drives Sales?
If sales last year were driven by markdowns and were thus unprofitable there is a good chance that planning around that number for the upcoming year may render the same—if not worse—results. If sales were off due to a downward fashion trend or poorly timed shipments the classification would also falter and the store may in fact end up under-planning the classification. Sales planning projecting forecasting or whatever label you wish to assign to it needs to be done at the classification level and not by brand (see March/April SRT article on “Classification Merchandising”). Most independents almost always want to plan for an
Increase in Business
An unrealistic sales forecast will generally lead to an overbought situation which in turn will lead to increased markdowns at best and decreased turn and cash flow at worst. Classifications get planned up based on profitable sales and trends and down when the reverse happens. Merchandise planning that originates at the class level and rolls up to the department and onto the store level is referred to as bottom-up planning—as opposed to top-down planning that emanates from a total company plan and works its way down to the class level.
Planning Stock Levels
Planning the needed stock level to support the sales plan is the next phase. This is accomplished by the use of stock/sales ratios. A stock/sales ratio is simply a relationship between stock and sales. It is related to the turnover and the proper timing of deliveries. Stock/sales ratios are different for each classification and for every month. This is perhaps the single most compelling reason for automating the planning process.
Example
For example a classification that is planned to turn three times would have a s/s ratio of 4/1. This can also be viewed as the number of months of supply to have in stock. (In fast numbers that’s 12 months/3 turns = 4 months of supply.) If a classification holds more than it can sell for a given period of time the stock/sales ratio increases and over time turn will decrease. In severe examples this can lead to higher markdowns than usual reduced margins and an overall reduction in GMROI (gross margin return on investment) as well.
Current Retail Value
Getting the inventory planned correctly is a vital step. When using the retail method of accounting as we are in this discussion stocks are planned at the current retail value. This means that markdowns are recognized when they are taken as opposed to when the merchandise…
Dise is actually sold.
This reduces the “market” value of the inventory by the amount of the markdown which increases turnover and generates additional OTB dollars to land new merchandise. Some systems do a much better job at handling this than others; you can trust me on that.
So far we have discussed the two most important elements in the creation of an OTB plan: sales and inventory forecasting.
If errors are made in either of these areas the OTB plan is going to be wrong. After planning sales and stock levels markdowns need to be planned for. Some stores fail to do this arguing that the additional inventory planned to compensate for the markdowns leads them to become overbought. I would argue the reverse. By not planning for the markdowns the classification can become under-stocked and thereby miss potential business—and who wants to risk that?
Store history can help us with the planning of markdowns. Traditionally seasonal classes like sandals and winter boots show heavier markdowns toward the end of the selling season. Knowing this we can plan our buys around this to take advantage of promotional goods for these expected “sale” periods.
Other components that must be recognized are merchandise transfers in and out and vendor returns.
Once these are properly accounted for we now have our gross planned receiving at Open-to-Buy: No Secrets but Lots of Sense. Ritchie Sayner23 nsra.orgretail. This number can readily be converted to cost for stores that prefer buying at cost as opposed to retail using the cost compliment of the initial markup of the classification.
Subtract On-Order from Planned Receiving
Our final step in OTB planning is to deduct what is already purchased by month of planned delivery. Once the merchandise-on-order is subtracted from the planned receiving figure you have your open-to-buy number. Simple right?
OTB plans are typically done for a season.
Seasonal Planning
Say spring or fall and generally though not always in six-month increments depending on the commitment requirements of the particular classification. A good planning program is not static. It should revise itself monthly based on the rate of sale in each classification amount of markdowns needed or taken and other factors.
Spending Guidelines
A good rule of thumb for our current economic climate would be to consider spending no more than 60% of the season’s OTB up front reserving 20% for fill-ins and 20% for promotional buys. This is a guide only and will vary based on type of store and the classification involved.
Consequences of Poor Planning
Results of poor OTB planning or no planning can be quite costly and generally lead to inventories that are out of balance. Under-planned classifications lead to lost sales whereas over-planned categories typically end up less profitable due to markdowns and slower turnover.
Reporting Accuracy
Attention also needs to be given to reporting accuracy since inventory variance can substantially alter the merchandise plan. The capture of markdowns and transfer reporting is a good first place to look if you encounter an inventory variance that is outside of industry norms.
The Importance of an OTB Plan
Not using an open-to-buy plan is like driving a car without insurance or building a house without a blueprint: dangerous. Sometimes the outcome can be disastrous.
Ritchie Sayner is vice president of business development at RMSA Retail Solutions which works with retailers to improve performance. As a courtesy to NSRA members RMSA will offer a one-time review and analysis of any member’s OTB plan at no charge or obligation. Email RSayner@RMSA.com for details.
Summary
The article discusses the importance of open-to-buy (OTB) planning for independent retailers emphasizing that accurate sales and inventory forecasting are crucial for a successful OTB plan. It highlights the risks of poor planning such as overbuying or underbuying and stresses the need for a dynamic approach that adjusts based on sales performance and market conditions. Effective OTB planning involves understanding sales drivers planning stock levels using stock/sales ratios and accounting for markdowns and merchandise transfers.
“Not using an open-to-buy plan is like driving a car without insurance or building a house without a blueprint: dangerous.”
Real-World Examples of Open-to-Buy Planning
Open-to-buy (OTB) planning is crucial for retailers to manage their inventory effectively and ensure profitability. Here are some real-world examples of how OTB planning is applied in different retail scenarios:
- A clothing retailer uses OTB planning to prepare for the summer season by analyzing past sales data of summer dresses. They plan their inventory based on projected trends and allocate 60% of their budget for initial stock 20% for restocking popular items and 20% for promotional sales. This strategy helps them avoid overstocking and markdowns at the end of the season.
- A footwear store implements OTB planning to manage the inventory of winter boots. By recognizing the pattern of heavier markdowns at the end of the winter season they plan their purchases accordingly ensuring that they have the right stock levels to maximize sales and minimize excess inventory.
- An electronics retailer uses OTB planning to introduce new gadgets. They allocate a portion of their budget for initial stock and reserve funds for unexpected demand spikes and promotional opportunities. This approach allows them to quickly adapt to market changes and optimize their inventory turnover.
