rethinking Open To Buy Management
The Open to Buy or OTB is a common concept in the fashion industry, that is used by buyers and retail managers to control trends in a proactive way. Their main goal is to optimise inventory levels while maximising profits. Open to buy is often used as a control measure that aligns orders to ensure the maximum sales results, with the minimum investment in merchandise.
In this article, we tackle the open-to-buy concept from different angles, as a financial tool, and as a process. This is to understand why OTB is crucial to improve financial performance but also inventory management. x
Our main goal is to remove the complexity of this concept and understand:
What is Open To Buy?
OTB is not a complex formula but a simple concept that requires planning and diligence to balance on-hand inventory levels and future purchasing. The common misconception that industry retailers and brands make, is to consider OTB as only a financial tool but defining the OTB function entails much more than that:
- The OTB is a financial budgeting tool for retail merchandise, designed to manage a retailer’s most significant asset, their investment in inventory.
- The OTB is also a process, that provides guidance on how much to buy, given current trading performance and future expectations.
As a budgeting tool, it works at a certain level of aggregation (e.g. company, department, classification, or other relevant product attributes), in currency, at cost, and retail value.
It helps to control your investment portfolio, to have a continuously productive investment in the right kind of stock.
As a process, it is used for both pre-season and in-season (re-)allocation of investment, where changes in expected future sales will trigger the users to adjust intakes of merchandise according to changes in consumer demand.
The Open to Buy is not relevant for replenishment items such as long shelf-life products, e.g. NOOS, Fundamentals, Basics, NOS, Continuity, or Evergreen. This is because when the product does not change between seasons or even years the risks and inventory requirements are ‘known’. Therefore, they can be managed differently and do not require an OTB.
Inventory intakes should be controlled by managing dynamic buffers at the point(s) of supply and regularly ordering or calling off, sufficient units to support sales for the next replenishment cycle. Moreover, lead times, minimum order quantities, as well as volatility in supply and demand should be considered. But this is a different process and one that we’ll focus on another time.
Instead, the OTB works mainly for fashion items, for which the demand is even less predictable, and for which decisions on how much to buy cannot be controlled by maintaining buffers at different links in the supply chain to the consumer. For that, either lead-times are too long or demand too unpredictable.
Usually both.
This is the main reason why an OTB is maintained at a higher level of aggregation. While it answers the question of how many units to buy of a particular product group, a category, or a division, it doesn’t necessarily specify the item itself. For that, we need to consider the wider product offer, the learnings from previous seasons, and the strategy of the company.
What is the role of OTB in the Merchandise Planning Process?
Like any budget, an Open to Buy starts with a plan for sales, then compares actual results to that plan. Most sales plans are made for a season of, say, six months and broken down by month, or week. Regular product intakes are necessary to maintain sufficient stock levels to support those sales and to ensure there is enough stock for proper visual displays for the brick-and-mortar locations.
Most companies have a detailed merchandise calendar and strategy in place which defines the steps to get the merchandise from a retail concept to the shelves. The whole process can take many months, sometimes up to a year. The OTB is part of that process.
Since inventory is the biggest asset, and the biggest liability for any retailer, getting the flow of merchandise right is business critical. This makes an OTB process indispensable for any business
A good OTB process supports key decisions on when to reorder when to back off, and how to (re)allocate the spend between product categories.
Typically, the OTB shows planned and actual sales, planned and actual intakes and planned and actual opening and closing stocks, which helps to control future receipts.