Open-to-buy (OTB)

A financial budget that determines the amount of inventory a retailer can purchase for a specific period, considering planned sales, inventory levels, and desired end-of-period stock.

What is Open-to-buy (OTB)?

Open-to-buy (OTB) is a financial tool used by retailers to manage their inventory purchases. It involves allocating a budget for purchasing new inventory based on sales forecasts and financial goals. Retailers regularly monitor actual sales and inventory levels, making adjustments to their purchasing decisions as needed. OTB provides flexibility and agility in adapting to market conditions and ensures a balanced inventory investment.

In summary, OTB helps retailers control their spending and ensure that their inventory purchases align with sales forecasts and financial objectives.

How OTB works

Budget Allocation: Retailers determine a budget for purchasing new inventory based on their sales forecasts, desired inventory levels, and financial goals. This budget represents the amount of money available for buying new merchandise within a specific time period.

Monitoring Actual Performance: Retailers track their actual sales performance and inventory levels regularly. They compare this data against their planned targets and budget to assess how well they are meeting their goals.

Adjustments and Replenishment: Based on the comparison between actual performance and planned targets, retailers make adjustments to their purchasing decisions. They may increase or decrease the reorder quantities, introduce new merchandise categories, or adjust their assortment to align with customer demand and market trends.

Flexibility and Agility: OTB provides retailers with flexibility and agility in adapting to changing market conditions. They can respond to fluctuations in customer demand, seasonal trends, or unexpected events by adjusting their purchasing plans accordingly.

Optimisation and Profitability: By effectively managing their open-to-buy, retailers can optimise their inventory investment and improve profitability. It helps them maintain an appropriate balance between inventory levels, sales performance, and financial goals.

In essence, open-to-buy (OTB) is a process of budget allocation, monitoring actual performance, making adjustments, and ensuring flexibility to optimise inventory purchasing and improve profitability. It helps retailers align their inventory investment with their sales forecasts and financial objectives while responding to changing market dynamics.

Pros of OTB

Improved Inventory Management: OTB helps retailers optimise their inventory levels by aligning them with sales forecasts and financial goals. It ensures that retailers purchase the right amount of merchandise to meet customer demand without excessive inventory carrying costs. This leads to improved inventory turnover, reduced stockouts, and increased profitability.
Financial Control: OTB provides retailers with a structured approach to budgeting and spending on inventory. It helps them control their purchasing decisions by allocating a specific budget for a given period. This ensures that retailers stay within their planned financial limits and avoid overspending, leading to better financial control and improved cash flow.
Adaptability to Market Changes: OTB allows retailers to respond to market changes and customer demand in a timely manner. By regularly monitoring actual sales performance and inventory levels, retailers can make adjustments to their purchasing decisions. This flexibility enables them to adapt to changing market conditions, introduce new products, and avoid excess inventory or stockouts.

Cons of OTB

Reliance on Accurate Forecasts: OTB relies on accurate sales forecasts to allocate the appropriate budget for purchasing inventory. However, forecasting sales can be challenging, especially in volatile or unpredictable market conditions. Inaccurate forecasts can lead to overstocking or understocking, resulting in potential financial losses or missed sales opportunities.
Limited Flexibility in Budget Allocation: OTB allocates a fixed budget for purchasing inventory within a specific time period. This fixed budget may restrict retailers' flexibility in responding to unforeseen circumstances or sudden changes in customer demand. It can be challenging to reallocate funds or adjust the budget mid-cycle, which may hinder retailers' ability to adapt quickly to market dynamics.
Complexity and Time Investment: Implementing and managing OTB requires careful data analysis, monitoring, and decision-making. It can be a complex process that requires skilled personnel, time investment, and robust technology systems. For smaller retailers or those with limited resources, the implementation and ongoing management of OTB may pose challenges.

FAQ

Below you will find answers to common questions

How can I determine the appropriate open-to-buy budget for my retail store?

Determining the open-to-buy budget involves considering several factors. Start by analysing historical sales data to identify trends and seasonality. Then, factor in any anticipated changes such as new product launches or marketing campaigns. Review your financial goals and consider factors like inventory turnover rate and desired stock levels. Finally, assess your cash flow and available capital to determine a realistic and sustainable budget that aligns with your business objectives.

What should I do if my actual sales performance deviates significantly from my open-to-buy plan?

If there is a significant deviation between your actual sales performance and the open-to-buy plan, it's important to assess the root causes. Identify any external factors that may have influenced the sales, such as changes in market trends or customer behaviour. If the deviation is due to internal factors, such as pricing, assortment, or marketing, consider making necessary adjustments to align with customer preferences. It may also be necessary to review and revise your open-to-buy plan based on the updated sales forecast and adjust future purchasing decisions accordingly.