Every retailer knows that good inventory control is critical to ensuring an adequate level of stock is available to meet demand. Too much (or the wrong inventory) can slow your cash flow and reduce profits due to the need to mark down more than intended, while too little results in missed sales opportunities and reduced profitability.
No matter what products you sell, how you sell them, or the size of your business, every retailer must ensure they stock the right number of the right products at the right time. And the best way to calculate this is to use an Open-To-Buy plan.
If you Google the term ‘Open-To-Buy’ you are bombarded with myriad technical explanations and discussions. But at the end of the day, Open-To-Buy is simply a tool to assist retailers manage and replenish their most significant asset next to their people — their inventory.
In other words, Open-To-Buy is a financial budget for your merchandise. Without an Open-To-Buy plan, you’re simply guessing your inventory needs. This can lead to overbuying (especially when faced with overzealous suppliers who can be very skilled at encouraging retailers to buy early and more than they need), excess markdowns, cash flow problems and poor productivity.
In its simplest form, Open-To-Buy is calculated using Planned Sales, Planned Markdowns, Planned End of Month Inventory, Planned Beginning of Month Inventory and Open-To-Buy (in retail dollars).
What the above formula fails to address, however, is contingencies. To use an analogy, the Titanic didn’t sink as a result of hitting the visible portion of the iceberg. It sank because of the 90% of the iceberg that was hidden beneath the surface.
Too many buyers commit to ordering merchandise for delivery during the season purely based on last year’s sales figures without considering the potential for things to go wrong or differ from the plan. Good retailers base their purchasing budget on an Open-To-Buy (OTB) plan where not only do they have a sales number (based on a methodically calculated sales forecast) and planned markdowns, but they also account for things like merchandise shrinkage and late deliveries.
Good retailers therefore set aside some of their OTB funds for replenishment stock, opportunity stock and a reserve to act as a buffer when things don’t go to plan.
Another smart lever to use in an OTB plan is stock turn. Many buyers commit to a certain stock purchase figure at the beginning of the season, which can result in low stock turn by the end of the season. By strategically staggering purchases over the season, your company stands to benefit in a number of ways including:
1. Better cash flow.
2. The flexibility to cancel or change a stock order based on market volatility or consumer demand.
3. Improved company productivity because workflow can be spread evenly throughout the season rather than hitting all at once due to a massive influx of stock at the start of the season.
4. Better bottom-line results because you’re consistently bringing in fresh merchandise based on what the market wants, not what you think it wants. This results in the need for fewer markdowns to get rid of excess stock.
5. Reserves in the tank to enable you to make alternative plans when supplier deliveries fail to arrive on time.
6. A consistent measure across the company, which acts as a lever for future action.
As you can see, there are numerous benefits for having a strategically prepared Open-To-Buy plan, not just at a store or department level but also at a category level. In fact, the more detail you can drill down to (even to product level) the greater the potential benefits.
To assume that last year’s x means this year will be y can cost you dearly. You must plan your merchandising strategically to ensure there are ample reserves in the tank for every potential contingency.
In a perfect world, a buyer and a merchandise planner would always operate as a team because one balances the other. But even in small retail stores where to have both may not be viable, a good buyer can become an exceptional buyer when they understand the benefits of merchandise planning.
As long as the buyer balances obsession with a product with a strategic and analytical OTB plan, they will be able to keep their finger on the stock turn pulse at all times.
— The writer is Executive Director of Thought Leaders Middle East.
