What is Open To Buy?

Ecommerce businesses have a lot on their hands today. They’ve got to be on top of the game at all times. They need to evolve with change and be able to provide the best customer experiences to consumers who are well informed and who have a plethora of options to choose from. Sounds like quite a challenge right?

While a lot has been said about what entails an ideal customer experience, much of it revolves around customer engagement or service. Sometimes it is easy to overlook the role of merchandise management, in spite of it being a core part of the shoppers’ experience. Let’s face it, no matter how good your product or service is, what really matters at the end of the day is making them available for the customers. If the customer is not able to walk away with the product he or she is looking for, then you have lost the customer to your competitor.

Open to buy or OTB is an inventory management tool quite essential to your ecommerce business. It refers to the merchandise quantity your store can purchase within a certain time frame. In other words, OTB helps in understanding how much inventory is needed initially and then on a month-on-month basis to meet demand while ensuring healthy cash flows. It is a financial budget designed particularly to cater to the needs of retailers to help them manage their inventory better.

How to calculate Open to buy?

For calculating the Open to Buy, you first need to compile information on the following -

  • Planned Sales
  • Planned markdown (price reduction)
  • Actual inventory at the beginning of the month
  • The planned end of the month inventory

If you have the above information in place, the calculation is pretty straightforward.

Here is the basic formula to arrive at OTB :

OTB = Planned Sales + Planned Markdown + Planned end of the month inventory - Actual inventory.

For example, a retailer has a beginning inventory of $ 130,000 on 1st April and plans to have an ending inventory of $ 132,000 on 30th April. The planned sales for the month are $ 40,000 with $ 800 in planned markdown. By plugging in the values to the formula, we see that the retailer has $ 42,800 OTB in retail.

Why is Open to buy important to ecommerce retailers?

Online sellers, you need to stay on top of inventory control to ensure that you have the right amount of stocks in hand to meet the market demand. If you have too much inventory or the wrong kind of product, it can hold up your cash flows. It can also cause your profits to dip if there are too many item markdowns. On the flip side, if you under buy a product, which means you have too little of it, you miss out on opportunities to sell, your profits take a hit and your customers won’t be happy. This is where open to buy comes in handy. 

Open to buy helps retailers in several ways -

  • It guides the retailer on how much inventory is required, considering the current inventory at hand, those in transit, and those of outstanding orders.
  • With OTB an ecommerce retailer can stock the right quantities of the right products at the right time, eventually leading to increased revenues and margins.
  • Retailers can avoid situations of overbuying, stock-outs, and missed sales.
  • Retailers have better financial control and can elevate customer satisfaction.
  • Retailers can check the effectiveness of the plan, set higher standards for performance, and take measures for improvement if needed.

How to create an Open to Buy Plan?

Here is the step-by-step guide to preparing an OTB plan.

  • It starts with creating a sales plan. This is perceived as one of the most important decisions a retailer makes. The question that retailers need to ask themselves here is - how much am I going to sell this month with the stock that I currently have? 
  • Once you have your sales plan ready, it’s time to work on the inventory plan. At this point, you need to figure out how much inventory is required to meet the sales for the upcoming month. Don’t forget to track any markdowns or price reductions as this also reduces the stock in hand.
  • The next step in this process is to build the inventory receipt plan which looks at how much inventory is needed to have everything from sales to markdown covered to finish with the planned ending inventory.

With a well-thought-out OTB plan, you can boost your sales, lower your markdowns and better manage your inventory levels.

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