Open-to-Buy (OTB) Explained: What It Is, Who It’s For + How To Start

In the current retail landscape, one poorly-planned inventory order can result in excess stock or stock outs – both of which can cause major cash flow problems.

Against the backdrop of rising costs, wavering consumer demand and supply chain problems, cash flow woes can be the straw that breaks the camel’s back for retailers.

The key to survival – and success – is to plan inventory with precision and to buy exactly the right amount of stock to meet demand.

That’s where Open To Buy, also known as OTB, comes in.

What is OTB?

Open-to-Buy or OTB is an inventory planning strategy that helps retailers accurately work out how much inventory to buy.

An OTB plan can start with your revenue goal for the coming months and then factor in current and incoming ordered stock to ensure that you have enough inventory on hand to meet your revenue goals.

It factors in how many of a particular product (or your complete range) you have in stock and how much you expect to sell.

Inventory Planner’s advanced functionality means OTB can be used in flexible ways to suit your business:

  • Retail or revenue-based planning: this can be used when you have a revenue goal to hit and you need enough inventory on hand to meet your target
  • Cost-based planning: this is designed for inventory planning when you have a fixed budget available to spend
  • Unit-based planning: this is suitable for when you plan based on the forecasted unit demand, then use your open to buy amount to drive down costs from your suppliers and set target retail prices.

Who Should Use Open-to-Buy Planning

OTB is used by a variety of merchants of all sizes and from all sectors. However, it’s particularly well-suited to the following types of business…

  • Trend-based brands with lots of SKUs (such as fashion brands)

With OTB planning, buying budgets for future items can be based on historical data of how well products in similar categories have sold. This allows accurate predictions to be made for new categories, so merchants can make informed buying decisions.

OTB also makes sense for merchants who want to add a lot of new SKUs (rather than simply replenishing existing ones). Planning at category or vendor level gives merchants a look at what’s needed, while allowing room for new SKUs within the category to be introduced.

  • Fast-growing businesses (from any sector)

OTB planning factors in growth targets, including the percentage by which you want your year-on-year revenue to increase. It removes the guesswork and shows ambitious brands exactly what they need to spend on inventory to meet their goals.

Note: OTB can also be used to plan for static, everyday items that sell consistently throughout the year – but the actual replenishment of these types of items is usually best done on a SKU basis. Inventory Planner forecast, plan and replenish different categories of products in different ways.

Do OTB the easy way with Inventory Planner. Book your free demo now. 

3 Reasons to Start OTB Planning

Open-to-Buy is game-changing for retailers that want to take their inventory planning seriously. It allows for optimal stock levels, more flexible inventory and makes it easier to spot product trends – and that’s just for starters.

Here are three reasons to give OTB a try:

1. Better cash flow

Right now, cash flow is the biggest issue facing most merchants. By knowing the difference between how much inventory is needed and how much is available, you can streamline your inventory and ensure you always have the right products available in the right quantities, at the right time. This protects your cash flow and ensures you have funds available for everything from rent and wages to expansion and new products.

2. Buy with confidence

Open-to-Buy planning gives you an objective way to approach your merchandising so you can buy with confidence. By planning inventory from a financial perspective, business owners can make data-driven decisions, rather than just relying on a ‘gut feeling’ or spreadsheet-based guesstimates.

3. Avoid overstock and stockouts

Running out of stock is a surefire way to miss out on revenue and annoy customers that you’ve worked hard to win. Excess stock ties up your cash in goods you can’t shift. OTB helps you control your inventory so you avoid both these situations.

How to start with Open-to-Buy

If you’re keen to level up your inventory planning with OTB planning, you can take one of two next steps…

1. Go it alone

There’s a formula for calculating OTB that anyone can use:

OTB = planned sales + planned markdowns + planned end of month inventory – beginning of month inventory

This formula involves adding together your expected sales in a given period with the value of any discounts or markdowns and the value of your inventory at the end of the month, and then taking away the value of the inventory available for sale at the start of the month.

If it sounds tricky to get your head around, that’s because it is. Working out your OTB on your own is not for the faint-hearted and it can be complicated, tedious and error-prone.

2. Use dedicated software

There’s a simpler, faster and more effective way to calculate your OTB: by using dedicated software. Unlike other basic inventory planning tools, Inventory Planner by Sage includes OTB functionality as standard.

“OTB is an advanced feature of Inventory Planner, but it’s also a first step in high-level cash flow planning and inventory forecasting,” says Jill Liliedahl, Global Director of Product Marketing at Inventory Planner.

“In the current climate, OTB is critical for merchants that want to protect their cash flow and boost their bottom line. Our customers tell us being able to create OTB plans from Inventory Planner makes a huge difference to their operations – in fact, it’s why many choose us over other inventory planning tools.”

Why is OTB in Inventory Planner better?

Inventory Planner’s OTB tool is the best way to create Open-to-Buy plans you can trust. Here’s why:

It’s simple

Open-to-Buy doesn’t have to be complicated. Inventory Planner makes it simple and easy to understand, so you can input the right data and get a clear OTB budget that you can easily seed into your forecasting. Plus, like with all Inventory Planner’s functionality, there is expert support and training at hand whenever you need it.

🎥 Check out this webinar which shows what OTB in Inventory Planner can do. 

It’s flexible

Every business is different – and every Open-to-Buy plan looks different for that reason.

Inventory Planner’s OTB tool offers market-leading flexibility to suit your needs. For instance, you can:

  • Plan by product category but also by vendor, by brand or by bespoke ‘tags’ (this is a particularly advanced feature that we created in response to customer feedback to allow the most customized OTB configurations yet)
  • Plan for a specific warehouse or all locations combined
  • Plan by retail week (4-5-4 or 4-4-5) or by month
  • Choose a top-down or bottom-up approach (we recommend bottom-up when you’re getting started)
  • Factor in multiple variable, including previous years’ revenue (you can do this manually or seed from prior years’ data and you can add any percentage increase you like – it’s handy to play around with different figures here)
  • Include warehouse transfers and assemblies in plans
  • Automatically take mark-downs, current stock and incoming stock into consideration
  • Add in your margin to convert OTB value into units. Our latest advanced updates mean it’s now possible to also convert your OTB into revenue or cost.

It’s accurate

Once your OTB plan is finalized, you can factor it into your actual forecasting with just a click. Then, you can look forward to buying recommendations you can trust, even when the markets are all over the place.

Want to know more? The best way to see if our Open-to-Buy tool is right for you is with a free, personalized demo. Book yours now.