So What Exactly is a sell Open-To-Buy?

Marginal Cost Definition - So What Exactly is a sell Open-To-Buy?

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In the world of retail, Open-To-Buy is quite a buzzword. Do a Google quest on "Open-To-Buy" and over 100,000 references come up, many that are for consultants and software vendors contribution Open-To-Buy programs. Many small sell software packages offer an Open-To-Buy module as an add-on option. But there are few sell software packages that consist of an Open-To-Buy function as part of the core package. As a result, many small retailers struggle to find some way to effectively funds their merchandise dollars. Oftentimes when I'm talking with a potential client they'll ask, "Do you think I need an Open-To-Buy?" without honestly knowing exactly what an Open-To-Buy is.

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Marginal Cost Definition

So what exactly is an Open-To-Buy?

The clearest and simplest definition is that it is a financial funds for sell merchandise. Let's look at this more closely.

An Open-To-Buy relates directly to sell merchandise, is structured specifically to address the needs of retailers, and is a tool designed to aid retailers conduct and replenish their most necessary asset, their inventory investment.

An Open-To-Buy is a budget, and involves the full range of budgetary functions. It begins with the planning process, is future oriented, provides advice on how much to buy, and provides benchmarks for evaluating progress, and adjusting future plans.

An Open-To-Buy is a financial tool, in that the units of part are typically dollars, regularly sell dollars but sometimes cost dollars, and that it can be tied back to the financial operate process.

An Open-To-Buy can work on any level that a retailer needs it to. It can be used to track merchandise at the company, department, classification or sub-classification level. In rare cases for a small retailer, it can even be used to track an private item.

Fashion and Seasonal Merchandise versus Basic In-Stock Items

It is foremost to note from the start, that as a replenishment tool, an Open-To-Buy is not standard for all categories of merchandise. It is most standard for fashion merchandise where the definite items may change, but the departments, classifications and sub-classifications remain relatively stable, and seasonal merchandise where inventories are brought in at the beginning of the selling season, and need to be managed down to pre-determined ending level at the end of the selling season.

In the case of fashion or seasonal merchandise, an Open-To-Buy answers the question of how much to buy, but not necessarily the question of which definite items to buy. For that, a detailed assortment plan is necessary, which lays out exactly what items will be arrival in when, and provides a plan for how all of the private items come together to form a compelling merchandise assortment

In contrast, an Open-To Buy is not standard as a replenishment tool for day-in and day-out basics. These staple items are more effectively replenished using an self-acting replenishment program running off of pre-determined minimum and maximum inventory parameters. In the case of these in-stock basics, an Open-To-Buy may still serve a necessary funds and operate function at a branch or class level.

Planning

Like any budget, an Open-To-Buy starts with a plan, then compares actual results to that plan and quantifies any variances. Considered Considered planning is the necessary first step in constructing an Open-To-Buy.

The planning process begins with construction a sales plan. For small retailers, most sales plans are broken out by the month, although in some cases, especially highly seasonal businesses or categories, it may be more standard to plan sales by the week. The question to ask is a very basic one: "What is the most likely level of sales from stock (excluding extra orders) by month (or week)?"

Once a sales plan has been developed, the next piece of the planning process is to build an inventory plan. The question to ask is this: "How much inventory do I need at the end of each month to hold the next month's sales (in some cases the ending inventory may need to hold more than just one month of future sales), as well as verbalize effective merchandise displays?"

From there, other things like inventory adjustments and markdowns need to be planned.

Finally, from the plans that have been developed, an inventory receipt plan can be arrived at. For any given period (month or week), the planned inventory receipts is the planned ending inventory, plus the planned sales, markdowns and inventory adjustments, less the prior month's ending inventory. Stated someone else way, the planned inventory receipts answers the question, "How much inventory do I need to bring in to cover my sales, markdowns and adjustments, given my planned beginning inventory, in order to end up with my planned ending inventory?"

The inventory receipt plan serves several foremost functions. First, it serves as the inventory purchasing plan for future months. While it doesn't tell you specifically what to buy, (you need an assortment plan for that), it does tell you how much you need to by for receipt in each month. Second, because inventory purchases are typically the most necessary cash outflow for a small retailer, the inventory purchasing plan serves as a necessary input into a financial cash flow plan.

The completed Open-To-Buy plan also enables a small retailer to evaluate, before the season starts, necessary inventory productivity metric like inventory turnover and gross margin return on venture Gmroi) (see "Measuring inventory Productivity"). These are necessary measures of the productivity of the inventory investment, and evaluating the planned turnover and Gmroi allows the small retailer to pro-actively conduct these metrics for continual improvement.

In Season

A completed Open-To-Buy plan establishes the necessary benchmarks for evaluating exactly where you are once you get into the season. It's after the season gets underway that an Open-To-Buy truly earns its keep. In season, key decisions have to be made about what to reorder, what to back off on, and how to allocate any remaining Open-To-Buy dollars.

A well structured Open-To-Buy will present both the plan and actual results, and allow supervision to track the advance as the season goes along. Actual sales can be compared to planned sales, actual receipts to planned receipts, actual ending inventories to planned ending inventories, future open buy order quantities to planned receipts for each month.

Like any good budget, an Open-To-Buy needs to have a future orientation. It needs to be able to tell supervision how much inventory is needed in any future month to make the sales and ending inventory plans, given the current buy order commitments for that month.

The open-to-buy through any given month is the planned ending inventory less the projected actual ending inventory. For prior months it quantifies either the firm was over-inventoried or under-inventoried. For future months, it identifies through any given month either further inventory is needed or either too much inventory has already been committed to.

The open-to-buy within any given month is the planned receipts for that month less the current buy commitments. For prior months it measures the efficiency of the buyers and vendors in providing inventory as planned. For future months, especially for future seasons, it quantifies any remaining ready open-to-buy for that definite month.

Like any supervision tool, an Open-To-Buy is merely a tool to help a small retailer great conduct their inventory. It requires an introductory venture in time and concentration to build out a realistic plan, and diligence to verbalize it as you go through the year or a season. But it can yield dramatic results swiftly in most situations, from increased sales to leaner inventories and reduced markdowns and overstocks. It's a tool that in the hands of a fully committed small retailer can profoundly improve financial performance.

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