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 planning – which is also known as OTB planning, supply planning and merchandising planning – 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, according to units, cost or revenue
It’s a way to manage your supply to fulfill demand and meet your financial and service goals by factoring in how many of a particular product (or your complete range) you have in stock and how much you expect to sell.
An OTB plan can start with your revenue goal for the coming months and then consider current and incoming ordered stock to ensure that you have enough inventory on hand.
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.
Why is OTB important?
Up to 70% of new businesses fail in the first year because of poor planning. Even established brands can easily fall into the trap of not having enough stock or overbuying – which quickly causes cash flow disaster.
Against the backdrop of rising costs and an unpredictable economy, there’s even less room for error. Just one poorly planned inventory order can be devastating.
Open-to-buy or supply planning is the key to ordering inventory with precision, so you only buy exactly the right amount of stock to meet demand, avoiding excess stock and stock outs (which cause major cash flow problems).
Who Should Use Open-to-Buy Planning
OTB is critical for every successful business. It allows you to forecast how much you are going to sell and how much money you need to put aside to invest in goods. However, it’s particularly well-suited to the following types of retailers…
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Seasonal or trend-based retailers 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.
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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.
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Any brand with long supplier lead times
Merchandising planning is especially important for merchants with long lead times from overseas suppliers, such as a fashion business that orders jeans from India with a six-month lead time. OTB shows you if you can stay afloat while you wait for inventory to arrive, and whether your cash flow is healthy enough to place other orders.
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Non-seasonal retailers
Supply planning using OTB can be used to plan for static, everyday items that sell consistently throughout the year – but it requires a careful approach because the actual replenishment of these types of items is usually best done on a SKU basis. Inventory Planner simplifies this by making it possible to 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 supply planning 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 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.
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. Merchants can easily toggle between all of our OTB features as needed (no complicated spreadsheets necessary!).
Here are some of the top features:
- Plan in retail/revenue. Retailers have long used Inventory Planner to do open-to-buy planning by retail (aka by revenue) and this feature will remain. It gives merchants the power to plan how much inventory to buy to meet a target revenue target.
- Plan in cost. Most leading retailers plan based primarily on how much purchasing budget is available, so we’ve added new, simple open-to-buy functionality that does just that. It’s good news for companies using cost-based accounting, too.
- Plan in units. Some merchants prefer to plan based on forecasted demand, so we’ve made it easy for merchants to see exactly how many units to buy. This info can help merchants negotiate with vendors to boost profit margins.
- Plan by category, brand or vendor. Customers have the flexibility to plan by category, brand or vendor. However, it’s important to note that OTB planning by vendor requires caution if your vendors change within your planning period.
- Factor in POs. It’s vital that merchants can include incoming stock to any or all locations into their OTB planning, which is why Inventory Planner includes the option to consider any purchase orders that have been placed.
- Factor in transfers and assembly orders. More retailers are assembling orders in house to cut costs and transferring stock between warehouses before ordering new inventory. The quantity of inventory in other locations and soon-to-be-assembled inventory can be accurately factored into OTB plans, making location-specific planning easier.
- Plan using tags. This feature gives merchants the power to create flexible open-to-buy plans that fit the unique needs of their business. Users can quickly create custom groups of products using ‘tags’ and then plan based on these.
- Plan in retail weeks or calendar months. To compensate for the ‘53 week year’, some retailers like to maximize ‘like for like’ sales comparability between years by dividing the year into months based on a 4 weeks – 5 weeks – 4 weeks format. Inventory Planner allows OTB planning by retail weeks, with 4-5-4 and 4-4-5 options available, or by calendar months.
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.