4.2 Open-to-buy

An OTB budget, in a nutshell, is the total amount of money that will be invested into the assortment.

 

The OTB amount is incredibly important as the budget will play a big role in calculating the profitability and sales for the season. In a larger company, the OTB plan will be set by the head of merchandise, buying and finance. A smaller company, on the other hand, usually combines these roles into one. There are no set rules to how you should divide your OTB but generally, if your brand caters to both genders, you can start by dividing it into womenswear and menswear first and then move down to product category.

 

How to do Open-To-Buy planning

 

An OTB plan is an inventory management tool that helps you plan how much inventory you will need to stock on a monthly basis to fulfil your sales projections.

 

You must first start with planned sales for each product category or each store. The next step involves setting the stock cover in months for each category. Stock cover is the retail value/planned sales. Typically we would plan our inventory in a 3-month or 6-month period.

 

To calculate the OTB, we use this formula:

 

As an example, you need to plan how many tops you need to buy next month. Your opening stocks at the beginning of the month is $100,000, your sales forecast says your planned sales are $50,000 and your markdowns are $500. Your planned closing stock at the end of the month is $130,000. Based on the formula, your open-to-buy for tops next month is $80,500.

 

The OTB can be calculated both in value or units. Calculating in value will give you the budget to purchase your stocks with. Calculating in units will give you an estimate of how many units per product you will need to buy for your inventory. However, to calculate in units, you will need to set the average selling price first.