Good planning is important. I’ve also regarded a sense of humour as one of the most important things on a big expedition. When you’re in a difficult or dangerous situation, or when you’re depressed about the chances of success, someone who can make you laugh eases the tension – Sir Edmund Hillary
The Christmas period goes by in such a flash and then many retailers find themselves in a panicked state come the New Year, leaving a key peak season, not making their sales numbers and sitting on far too much inventory and therefore likely to be short on cash within the next few months.
How does this happen?
Step 1 is selling less product than you bought, while mixing in a buying pattern that has too much inventory coming in too early; making it easy to suddenly be cash poor. And for some small retailers, it’s a pattern that repeats itself year after year.
What small retailers who find themselves in this situation are lacking is a plan. They’re lacking a quantitative plan that tells them how much inventory they need and when to bring it in, and then tells them how they’re doing once they get into the selling season. In retailing, such a plan is called open-to-buy.
Open-to-buy is a merchandise budget, usually stated in retail dollars, frequently broken out by key departments or categories. It is particularly appropriate for fashion and seasonal merchandise, where the specific items may change, but the departments, classifications and sub-classifications remain relatively stable. Inventories that are brought in at the beginning of the selling season need to be managed down to a pre-determined ending level by the end of the selling season.
So how do we begin to put an open-to-buy to work? We have to build out a plan.
An open-to-buy begins with a sales plan, which for most small retailers is broken out by the month. The question to ask is a very basic one: “For each month, what is the most likely level of sales from stock (excluding special orders)?”
Once a sales plan has been developed, ending inventories need to be planned. The question to ask is this: “How much inventory do I need at the end of each month to support the next month’s sales (in some cases the ending inventory may need to support more than just one month of future sales), as well as maintain effective merchandise displays?”
Once sales and inventory has been planned, an inventory receipt plan can be arrived at. For any given month, 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 open-to-buy within any given month is the planned receipts for that month less the current purchase commitments. For future months, especially for future seasons, it quantifies any remaining available open-to-buy for that specific month. (consider product lead times and allow coverage of that stock item for the period involved)
A well thought-out plan establishes the critical 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 really gets put to work.
– A well-structured open-to-buy presents both the plan and actual results, and allows management to track progress 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 purchase order quantities to planned receipts for each month.
– An open-to-buy has a future orientation. The open-to-buy through any given month is the planned ending inventory less the projected actual ending inventory. For future months, it identifies through any given month whether additional inventory is needed or whether too much inventory has already been committed to.
– Within a season, an open-to-buy gives a small retailer the information necessary to make critical decisions regarding what to reorder, what to back off on, and how to allocate any remaining open-to-buy dollars. If a department is exceeding its sales plans, ending inventories will likely come in below plan, creating more open-to-buy. The open-to-buy quantifies how much additional inventory is necessary.
– An open-to-buy gives a small retailer the information necessary to assure that ending inventory levels don’t exceed plan, and tie up valuable cash. If sales are coming in below plan, ending inventories will likely come in above plan, shrinking any open-to-buy, or even creating an overbought situation. The open-to-buy quantifies how much any future purchase orders need to be reduced to get the inventory back in line.
Like any management tool, an open-to-buy is merely a way to help a small retailer better manage their inventory. It requires an initial investment in time and attention to build out a realistic plan, and diligence to maintain it as you go through a season. But it can yield dramatic results quickly 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 dramatically improve financial performance.
Brian Walker is founder and CEO of retail consulting company, Retail Doctor Group. He specialises in the development and implementation of retail and franchise strategies.