Open-to-Buy
OTB (Open-to-Buy, not Off Track Betting)
As I wrote earlier, setting prices can have a short-term impact on improving retail health. However, there is another important aspect that can lead to long term improvement of your retail shop. Open-to-Buy is what is needed. If you have knowledge of spreadsheet capabilities for adding and averaging, this should be a breeze.
Simply stated, an OTB is a three-step budgeting process for setting inventory levels, typically by department/class and by month. The first step is developing a sales plan (at retail) by month. Step two is determining inventory levels needed to meet each of those sales goals. Step three, the actual OTB, is the amount of new inventory needed to get to the next month’s planned inventory level. So steps 1 and 3 are “relatively” simple.
Step 1 can be determined by starting with some basic historical information. If you have sales figures for the past couple of years, you can do some simple averaging to determine an average sales number for each month. Then, after looking at these numbers, hazard your best guess as to where your sales are likely to head for the coming year. If you expect a 5% increase, then bump each sales projection by 5%. You do not have to have a crystal ball, just jump in and guess! The great thing about an OTB is that it is not meant to be stagnant! As situations change, adjust your sales projections for the future.
Step 2, determining a projected inventory level, is the hardest part. A simplistic method of doing so is to try and find out what your stock turn rate is by department/class. For more information on this, see the previous article on Stock Turn Rate.
OK, let’s say that your sales projection at retail is $30,000 for mens shirts and your best guestimate of turn rate is 3.0. That means that you must average $10,000 (at retail, not cost) throughout the year in order to attain those sales at that turn rate. As you look at the ebb and wane of your sales, build monthly inventory levels that eventually average to $10,000 per month. This is where knowledge of spreadsheet averaging is helpful. Let your inventory build prior to peak months, and start to diminish before the end of the peak selling months.
How accurate are you going to be? Probably not accurate at all. But that’s okay. It is a start and you can get better as you work on this. Most importantly, ANY budget is better than no budget.
Step 3 is simple math, once you have completed the tough Step 2. To determine the OTB for each month, you merely take Month 2 Inventory Minus Month 1 Inventory Plus Month 1 Planned Sales. Repeat this step for each preceding month, i.e. Month 3 Inventory Minus Month 2 Inventory Plus Month 2 Planned Sales.
As an example,
Jan Planned Sales $3,000
Jan Planned Inventory $6,000
Feb Planned Inventory $8,000
Jan OTB $5,000 ($8,000 - $6,000 + $3,000)
In other words, to build from January 1 to February 1, you will need an additional $2,000. However, you also anticipate selling $3,000 in January. Therefore, you need to cover that reduction in inventory. REMEMBER, THAT OTB IS AT RETAIL, NOT COST. DO NOT GO OUT AND SPEND $5,000!
Step 3a, if you are so inclined, is to change that inventory level from retail to cost. Many apparel buyers, both in golf and general retail, prefer to work with an OTB at retail. However, if you would like to know exactly how much that is in spending dollars.
In determining the cost dollars, it is best to know your IMU%. See the previous article on Setting Retail Prices – The Immediate Impact. If you price these shirts at a 55% IMU, then the cost of those items would be 45% (100% - 55%). Multiply 45% times the OTB figure of $5,000. So for January, your cost OTB will be $2,250.
When you finish this exercise for the entire year, you will see that you need to bring in fresh inventory each month. You also cannot dictate those exact schedules of delivery by suppliers. However, do your best! Ask suppliers to send 2 or 3 shipments instead of a large one for a three-month period. Or bring in one supplier in March and another in April. Fresh merchandise keeps customers interested!
I know that this is not an easy exercise, but it is worth it. Open-to-buy service is one aspect of my business. I developed proprietary formulas that calculate optimum inventory levels and I review my clients’ performance each month in a variety of ways.
What results can you expect? My typical client experiences a 15% decrease in inventory without a drop in sales. In many cases, sales increase because new merchandise is consistently arriving. Additionally, gross profit margins will increase 3-8 percentage points (not 3-8%, but that many points). I have had clients who were getting 38% gross profits who are now in the mid-40% range.
If you need help, just call me. It is very affordable.
Alan Fisher is the leading expert on inventory management in the golf industry. He has conducted numerous seminars across the US and Europe for the golf industry and has authored numerous articles on maximizing retail inventory. If you would like to know more about how you can make your retail a profitable part of your business, please contact him at any of the following:
alan.fisher@mygolfretailguru.com
+1 619.723.4653 mobile
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