What is Open to Buy?

In retail, open to buy (OTB) planning is In-Season merchandise planning. During In-Season, planners create receipt plans to support inventory and sales goals. These merchandise plans are approved and moved into a version of the plan, typically called the Original Plan. Once the season starts (in-season), actual inventory, markdowns and sales occur, and plans become updated.   Your merchandise plan has now become a blend of actuals and planned data. So what does all this mean, you’re probably thinking?

In merchandise financial planning, there are two distinct phases:

1. Pre-season planning
2. In-season planning

Pre-season merchandise planning is figuring out how much money will be in each buyer’s wallet for the upcoming fiscal year. The proportioning of your budget is done by examining your anticipated demand, inventory and margin goals for each product category you carry. In other words, your category strategy.

See also: What is merchandising planning?

Once you’ve determined your budget allocation for each buyer and your fiscal year starts, you move into the “in-season” planning phase. As your buyers begin to buy products with their allocated budget, the unspent dollars are known as their open-to-buy. In-season or open-to-buy planning is an iterative process that considers actual events happening with your inventory, markdowns and sales and adjusts your merchandise plans to meet changing marketing trends.   With in-season, your plans are now a blend of actual performance and plan data.

Why is Open to Buy important?

Inventory is a retailer’s most significant expenditure. Therefore, inventory investment must be productive, accurate, and timely.

A retailer’s goal with Open to buy is to purchase enough stock to support the sales profitably. Profitability means having the inventory when and where your customers want it and not having too much, leading to markdowns.

Not having a product when your customers want it is lost sales and leads to unhappy customers. But, on the other hand, having too much stock that you can’t sell means margin eroding markdowns.

Check out Improve your profit margin

Challenges with Open to buy Planning

In-season OTB planning is all about agility. The quicker you can spot trends and act on them, the better able you will be to equip your buyers to capitalize on the trends. It all comes down to timeliness and accuracy.

The actualization of your plans in season is critical to the success of open to buy planning. Therefore, integrating actual data sources is vital. Unfortunately, disconnected systems mean planning and buying teams are using their precious time copying and pasting data instead of analyzing and spotting trends. Merchant teams still spend Monday mornings entering and massaging data into their Excel spreadsheets.

Speaking of excel… Retailers spend millions of dollars in inventory and take on the risk of these plans by using error-prone Excel. Five years ago, JP Morgan Chase lost $6 billion in a case that came to be known as the “London Whale Incident. “The culprit? Copy and paste errors into an Excel spreadsheet. Can you afford to lose money due to copy and paste mistakes?

Last but certainly not least, there is zero visibility for the organization when plans are stored on everyone’s desktops. Accessible information is key to decision-making. Planners and buyers must be able to collaborate in real-time. Management needs to see where their inventory investment is and how it’s performing. Decisions and actions cannot take days to execute. Time is money.

Additional resources and information:

• Cash is King – How to guard it
• Is financial planning different from merchandise planning?
• Merchandise planning critical to your bottom line
• Common buying mistakes that are impacting your bottom line
• daVinci’s introductory training series on MFP
• Fundamentals of Merchandise Planning