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What’s your OTB?

PURCHASE PLANNING
MADE EASY

Closing in on an open-to-buy budget

BY: ALAN ROSEMAN

T

he holiday season is over, and in addition to landing new spring merchandise, it’s time to start planning
your buys for next fall. But what’s
important in planning for any season? Most
retailers’ first response is sales, but sales are
only a means to the end. Another answer is
cash flow, but the truth is you must siphon
profits from that flow to be successful.
In order to turn all efforts into profit, you
must do a lot of little things right, including
buying, marketing, expense management and
much more. A significant factor in your profitability is cashing out of your remaining fall
merchandise at the end of the season. The less
surplus inventory you have left that requires
markdowns and clearance sales, the greater
your profits will be. On the other hand, you
need to have enough merchandise to satisfy
the needs and wants of your customers.
A profitable season depends as much on
the right inventory levels and merchandise
as it does on sales. Investing in the right inventory, however, is easier said than done;
and accurate sales forecasting is one of the
keys through this door. If you can predict
the future, you can be better prepared for it.
Palm reader aside, an open-to-buy (OTB)
merchandise plan—or budgeted amount
available for purchases—can put a shop in
better position to do that, serving as a financial fortune teller of sorts. Now let’s create a
simple open-to-buy merchandise plan for
next fall to ensure foreseeable success when
you peer into that crystal ball.
CLASSIFIED
Each classification or category of merchandise in a store should contain similar items
that can be grouped according to the same
customer demand. For example, socks, Tshirts and outerwear are each separate classifications. If a customer comes in to buy
socks, selling him a T-shirt will not eliminate his need for socks, however great the
add-on sale.

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QQ ACTION OUTDOOR & BIKE QQ JANUARY/FEBRUARY 2012

Planning by vendor can cause problems, as not all venders are equally strong in each class. Just
because a brand makes a great T-shirt doesn’t mean that its socks or outerwear will sell as well.
A vendor that was hot in 2011 may not be equally strong in 2012. Planning by brand can also
bring about duplication of similar styles and excessive inventory and investment. Additionally,
sales trends are dictated by customer demand, which most often happens at the class level.
BUILDING OTB
Using a worksheet, list each month for which you are building your merchandise plan, with
a separate section for each planning class.
T-Shirts

July

Aug.

Sept.

Oct.

Nov.

Dec.

$1,000

$1,200

$1,500

$1,600

$1,800

$2,500

$250

$200

$100

$50

$150

$175

Planned Ending Inventory

$2,500

$3,300

$4,125

$5,200

$5,850

$3,750

Previous Month Ending Inv.

$2,000

$2,500

$3,300

$4,125

$5,200

$5,850

Open-to-Buy (Retail)

$1,750

$2,200

$2,425

$2,725

$2,600

$ 575

Sales
Markdowns

To fill in this chart, we must consider values in each row, explained below.
FORECASTING SALES
To manage your inventory effectively, you need to know what you think your sales will be
for each month of the projected season. Many retailers start by using last year’s numbers and
make adjustments for planned store events and promotions. This can often initiate inventory
imbalances because what happened in one class in 2011 may not be the same in 2012. Will
sales be 10 percent greater or down 10 percent?
For instance, if your store had outstanding outerwear sales for each month in October,
November and December of 2011, do you plan your 2012 sales equal with last year, up 10
percent or down 10 percent for each month? If you planned sales up 10 percent and those
sales don’t materialize, then you risk the possibility of ending the season with too much inventory, resulting in costly season-ending markdowns. But if you planned sales too low, you
may be under-stocked and losing sales.
Of course retailers know that, often, sales can be driven by markdowns. Just because your
store did wonderful outerwear business in November does not mean it was profitable if those
sales were driven by excessive markdowns. Success means forecasting profitable sales.
ESTIMATING MARKDOWNS
Markdowns are any reduction in the price of an item from the original retail sales price
when it was received into the store. Although markdowns may take the form of discounts
to friends, family and employees, too frequently, they are a result of excessive overbuying.
When buying mistakes are made, markdowns may be necessary to turn merchandise from
non-performing vendors, styles, colors or sizes into cash.
Markdowns are healthy if taken selectively in-season. It is prudent to take small markdowns on limited items during the season when there is still demand for those products

talking about a large financial investment in inventory. Successful retail is a fine line between too much and too little. he started which figures in the markup to reveal what can actually be spent. Alan has had many articles published as a guest writer for TransWorld Business and has also presented many seminars for BRA Boot Camps and Certification Programs.000 in T-shirt inventory and About the Author: Alan want to wind up with $2. How many months’ supply do you statistical analysis that a sophisticated openneed on hand at the beginning of the month to support your strategic sales? If you planned to-buy merchandise plan can offer.000 on hand to There are many planning tools and sersupport those sales for the month? If sunglass sales are lower during winter months. we begin the month with $2. Strategic Results with the multiply the retail amount by the complement of the initial markup (100-IMU). In 2004. dent specialty retail stores increase sales. then the possibility exists that additional merchandise may be needed to drive profitable sales. if they are not in line.000 worth of sunglass sales in May. this was all created with retail numbers and will need to be converted to cost. keep track of actual sales compared to forecasted sales.000 and the estimated markdown sales of $250. the more challenging it will be to Projecting the correct monthly inventory levels to drive profitable sales is the key to your mermaximize profits. As the season progresses. profits and your store’s bank balance. do you need $3. REPEAT Once you have completed your simplified open-to-buy merchandise plan. you should demand accuracy for MERCH MATH success.4 er to sell last season’s outerwear in = $700 May or June. On the flip side. Keep in mind. estimated markdowns and projected inventory levels. Roseman has more than 35 given the forecasted sales of $1. this is a very chandise plan and will have a major impact on sales. numbers does not take into consideration In order to have the correct monthly inventory level to support your forecasted sales. elementary planning tool and could cause Not having the correct amount of inventory in a specific class may result in lost sales and lost costly buying errors with the wrong assumpcustomers. perhaps markdown strategies need to be updated or a review of remaining orders and forecasting techniques is necessary. This plan should be reviewed and updated monthly. Alan has focused on the action sports industry and worked with many surf.biz. JANUARY/FEBRUARY 2012 QQ ACTION OUTDOOR & BIKE QQ 33 . The further off the line PROJECTING INVENTORY LEVELS you tread. and because we are will sell faster. but not all will provide a sense to stock fewer during this period and put those inventory dollars into merchandise that high degree of accuracy. skate and snow retailers. OTB would be $500.500. we’re now years of retail experience in open to buy that much more to reach the projected ending inventory (see chart #2 above). flow and profits. for example.000 or $5. retailing.000. AOB Now that we forecasted sales. for instance. it makes vices available. it is time to put it all together to calculate your monthly open-to-buy worksheet (see chart #1 above). As a Manhattan Beach.strategic-results. Basing sales forecasts on last year’s which ties up cash and can necessitate markdowns. To compute OTB at cost. However. we’ll say that the markup is 60 percent (see chart #3 above). Without any sales factored in. Estimating expected markdowns is a necessary component of any open-to-buy merchandise plan. If goals are being exceeded (without excessive markdowns). www.biz. alan@ strategic-results. all phases of specialty store Remember. don’t save it someplace never to be viewed again. when the store is stocked with fresh spring/ summer merchandise. $4. resident.000 $250 $2500 $2000 $1750 Convert to Cost: Cost = Retail x Cost Complement 3 rather than taking large markdowns OTB at Cost = OTB at Retail X (Complement of IMU%/100%) on huge amounts of end-of-season = 1750 X (100-60/100) merchandise when demand for = 1750 X (40/100) those products has waned. cash REVIEW. If we look at July. It’s hard= 1750 X . having too much inventory could create an overstocked position tions. you industry sales trends and the high level of will need to adjust your monthly stock-to-sales ratio. Calif. For this exgoals of helping indepenample. for $1.2 1 + + = Forecasted Sales Estimated Markdowns Projected Ending Inventory Previous Month Ending Inventory Open-to-Buy (at retail) Convert to Cost + + = $1.