What is Open to Buy? (Definition, Formula, Examples)

What is Open to Buy? (Definition, Formula, Examples)

Open to buy optimizes inventory efficiency

Inventory makes or breaks retailers. Buying too much ties up cash in unsold stock and keeps you from ordering product your stores need. Buying too little reduces sales — and the cash you need for more inventory. Open to buy (OTB) planning lets you 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.

Here’s everything you need to know about the open to buy process.

What is open to buy?

Budget is a key factor in the open to buy process

Open to buy definition

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:

open to buy formula

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 example calculation

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.

OTB management

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.

Let Retalon’s expert team give you a free demo of the Open to Buy system using your own data. Contact us to learn more.