Why Planning and Trading Open-To-Buy is Key to Your Retail Business
This article is written by Sarah Johnson, the founder of Flourish Retail.
Open-To-Buy, or OTB as it’s commonly known, is relevant to all retail businesses.
As merchandisers, we hold the secrets to generating sales and profit, and it is all in the planning. At a simplistic level, by planning, we create the shopping list that the buyer uses to select or develop products, and the amount of money available to spend on them – the Open-To-Buy.
Translating this Open-To-Buy ‘budget’ into products and ranges which the customer wants, at the time that they want it, will mean we deliver the sales and profit that the business needs.
But providing a budget is only one facet of why Open-To-Buy is useful in your business.
Let’s dig into it some more.
Stock Planning: Customers & Cashflow
Stock (inventory) is a key part of the Open-To-Buy calculation, but it is also important to other areas of the business and, perhaps more critically, your customers.
They’re the most important part of your business, as without them buying into your brand and product, there will be no sales or profit. Understanding them as your audience, their wants and needs, will translate to sales and, hopefully, brand loyalty and retention. By having the right stock, at the right price and at the right time, you can fulfil this demand.
Planning and phasing your stocks not only creates newness, excitement and marketing content, it also helps to manage the practicalities of cash flow, logistics and storage.
As you know, stock in = cash out. Stock in also requires handling and storage, all of which incur costs as well as the practicalities of space and storage. So in managing your stock, by default you manage your cash flow.
The benefit? By not tying cash up in excess stock or costs, it can be invested elsewhere in the business which, in turn, can drive more profit.
Balancing the Stock Scales
We know that we need to get our stocks right to fulfil the demand whilst managing our cashflow. It’s a balancing act which you need to manage to ensure that you have the right amount of stock, proportionate to your sales demand and trading stance.
So what happens when those scales tip?
Maybe it is better to have excess stock, then you can always fulfil customer demand.
But what if the stock you have isn’t what the customer wants, or you don’t have enough customers to move the quantity that you bought?
You’ll start to build a stock mountain, which, continually added to, can only be dealt with through promotion or clearance markdown, impacting the profit for the business. Sometimes that product loiters for so long that it simply won’t sell, even at a low price and so you make a loss, ‘jobbing’ off the stock for a negative margin.
But it isn’t just your profit which is impacted. The current societal focus on sustainability and the impact, particularly of fast fashion, on our environment, is now a key focus for brands in this new decade. No one wants to be consciously adding to the mounds of clothing found in developing countries such as Ghana.
Instead, you tip the scales the other way, you keep stocks tight. But then you start to miss sales. You haven’t planned, and therefore bought enough stock, and so you can’t fulfil your sales demand. Customers, unable to find what they want, when they want it, go to your competitors and your market share, along with your sales and profit, starts to drop.
So it’s crucial that as merchandisers we are as accurate as possible with our planning, swiftly moving into being flexible and reactive with our trading.
Trading’s Balancing Tool
We know how key stock planning is, but the lever to keep the scales balanced when you’re in season and trading is Open-To-Buy.
It’s stock which you haven’t committed to – that you can change, amend and flex to meet your sales performance and customer demand. Using that lever in-season will allow you to minimise risk and maximise the profitability of the business.
Understanding Your Open-to-Buy By Week, Month and Season
Using your WSSI (Weekly, Sales, Stock and Intake) tool, you are able to see how you are trading against your plan.
By reviewing your performance, you can see further ahead than simply using a weekly snapshot, identifying whether there is any risk or opportunity to your overall sales and profit plan and managing your stocks accordingly.
Applying the Open-to-Buy Lever
You may think that Open-To-Buy is only relevant to trading when you are hitting or exceeding your sales, as by its very nature, it generates an additional budget to be spent. So how can you use Open-To-Buy as a lever when you aren’t trading well?
Automatically in a WSSI model, you shut down Open-To-Buy when your stocks go above your targets as you certainly don’t want to compound the issue by adding more stock into an already full pot.
But by managing your existing stock and commitment effectively, through promotional discounts to increase stock turn, or phasing or altering existing intake, you can generate Open-To-Buy and give yourself back the flexibility to buy into trends or stock which your customer really wants. This gives you back the ability to claw back those sales and potentially, profit.
Flexing the Open-to-Buy Formula Across Planning and Trading
Making your business flexible and reactive will put you one step ahead of your competitors, so by holding back one key part of the Open-To-Buy calculation – markdown spend – you could become more reactive.
Think about when you need to place orders – what is your product lead time? On shorter lead time areas, ‘releasing’ markdown at relevant points in the season works well because you don’t need to place stock six months ahead. Instead, you can wait to see how you perform at the start of the season and then add your planned spend in later if you hit your sales plans.
Missed your sales? Then the stock you’ve already placed will provide for your markdown sales, which means you haven’t added anything further to your stocks or your markdown spend and you haven’t impacted your profit in the same way you would have if you’d bought all your stock upfront.
Open-to-Buy Planning: How-To Guide
To quote Benjamin Franklin, “Failing to plan is planning to fail”, so it makes sense to invest the time to plan your season and your Open to Buy, using your data to ensure that you have the optimum range for your target customer.
But let’s also trade, react to trends, customer demands and external factors like sustainability and the environment. The more we harness the power of Open-To-Buy as a trading tool as well as a planning mechanism, the more efficient and profitable our retail businesses will become.
Calculating Open-to-Buy starts with planning the Sales, Markdown, Returns and Stocks for the season. Need to know more? Find out about the practical side with the OTB Guide.
This article is written by Sarah Johnson, the founder of Flourish Retail.
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