24 Feb What is Open to Buy? (Definition, Formula, Examples)
What is Open to Buy?
(Definition, Formula, Examples)
Inventory management is a fundamental ingredient to the success of today’s retailers – it can even make or break a retail business.
For example, retailers carrying too much inventory or too much of the wrong product will tie up cash flow restricting them from ordering products their store needs. In these situations, they are often forced to implement markdowns to move excess inventory reducing profits and lowering GMROI.
In contrast, buying insufficient inventory quantities can result in lost sales, and reduced profits and drastically influence the overall customer experience and brand perception.
Stocking the right amounts of the right products at the right times requires a dynamic and data-driven approach that must incorporate open-to-buy plans.
So, what is open-to-buy, how is it calculated and what benefits can it provide for today’s retailers?
Keep reading to find out.
What is Open-to-buy?
Open-to-buy is an inventory management strategy which helps retailers understand how many products they need to buy.
Using an OTB formula, retailers create a plan in which they can calculate the money required to purchase future inventory orders for a specific sales period. Or, open-to-buy (OTB) planning lets retailers control inventory and stay cash flow positive.
Other benefits of OTB management include:
- More flexible inventory.
- Optimal stock levels.
- Less overspending.
- Fewer markdowns.
- Spotting trends earlier.
Let’s take a look at the technical definition below.
Open-to-buy definition: a financial budget for retail merchandise planners.
Essentially, OTB is a purchasing plan which takes into account current inventory levels and projected sales for a set time period.
Who uses open-to-buy: OTB can be used at all levels — company-wide, sales channels, departments, product categories, and sub-categories.
Why use open-to-buy: Calculate the optimal inventory quantity to purchase, in order to meet customer demand for a set sales period.
What is the open-to-buy formula?
Open-to-buy is the difference between where you expect to finish a sales period and where you started. Where you started is simple: it is the planned inventory at the beginning of the sales period. Where you expect to finish is your closing inventory plus your planned sales and markdowns.
The open-to-buy formula looks like this:
The inventory numbers should include store stock, distribution center inventory, and anything in transit. There is one exception: sold but undelivered products are not counted as Beginning of Month Inventory.
You can calculate OTB on a monthly or weekly basis. Other sales periods, such as promotional seasons, are also useful. Although the open-to-buy formula can be unit-based, it is typically done in dollars — either retail value or cost.
Open to buy example calculation
Let’s look at how to calculate open to buy:
Open to buy process
Naturally, OTB budgeting is more than running a formula. It’s part of a three-step open-to-buy process:
Step 1 – Know your inventory turnover
Turnover rates impact OTB. You need to have a clear picture of your current inventory levels and an accurate demand forecast for your OTB strategy to succeed.
Step 2 – Run your financials
Create your budget using the OTB formula. A granular OTB planning approach – by store, by week at the lowest product sub-category or SKU – generates the most accurate budgets.
Step 3 – Tracking & Adjusting
Your OTB process must account for the hundreds of factors impacting demand and inventory as they happen. It needs to be agile enough to adjust quickly when needed.
Small shops can use quarterly OTB spreadsheets. However, more complex assortments need better capabilities:
1. Good OTB management starts with good forecasting
AI-powered demand forecasts can account for more variables on a more granular level than spreadsheet-driven analysts enabling you to purchase optimal inventory quantities.
2. All forecasting needs to be dynamic
Unexpected changes in inventory availability or supply chain breakdowns derail the plan. A dynamic forecast should automatically adjust the OTB budget to reflect the most current situation.
3. Automate as much of your OTB budgeting as possible
Replenishment processes should automatically optimize purchases and allocation based on the latest budgets. Advanced OTB analytics tools can provide proactive next-step recommendations and generate purchase orders.
4. Ensure OTB is unified across all retail divisions
Everyone from your buyers and planners to your finance team should be on the same page. There needs to be clear visibility across the entire business to facilitate accuracy and efficiency.
OTB Planning Software
Retalon’s unified merchandise planning suite includes an Open to Buy system. Using AI and advanced analytics, it dynamically calculates granular OTB budgets to recommend optimal purchases and automatically generate purchase orders.