Why a Well-Managed Open-to-Buy Works
I have written several blogs about OTB and the value it brings to a golf retail operation. I also know that many professional organizations, such as the PGA, believe in OTB as well. But have you ever wondered why it works?
First, an OTB involves the establishment, at the class level, of a monthly sales plan and a monthly inventory plan. Anyone with some historical information can calculate a reasonable sales plan. The monthly inventory level, which should not be calculated from history, is the hard part. Several companies, including my own, have created mathematical formulas to determine the optimum inventory levels. After determining these levels, the actual monthly OTB is calculated by subtracting the current month’s planned inventory from the next month’s and then adding the planned reduction of inventory from sales.
$6,000 July 1 planned inventory at retail
$5,000 June 1 planned inventory at retail
$1,000 June planned sales at retail
For this example, getting from June 1 to July 1 will require an additional $1,000, but with planned sales of $1,000, an additional $1,000 of new merchandise is needed. This process is repeated for the entire year to determine the spending requirements for each month.
Now, the golf shop is armed with a spending budget, a sales plan and an inventory plan. Step 1 is to take that budget for the coming months and determine exactly with whom those dollars will be spent. Part of the challenge of the OTB is that vendors typically want to ship all of the merchandise at once and that is a detriment to turn rates, shrinkage and always having new merchandise arriving each month. I have had clients who have been able to negotiate properly timed deliveries or have gotten one vendor to ship in the first month and another in the second. In other cases, they have dropped a vendor with stringent delivery policies for one that can meet the shop’s needs.
Step 2 is to review the actual sales to planned sales each month. If sales are below pace and the buying plan is on target, that means that excess inventory will be arriving since it is not reducing through planned sales. HOWEVER, ONE MONTH IS NOT A TREND AND YOU DO NOT WANT TO OVERREACT TO A ONE MONTH VARIANCE.
But in the case where a trend of lower sales is occurring, there are two actions that can remedy this. One is to try to reduce, delay or cancel orders. As we know, this is not always feasible. However, it is feasible to take some of the excess inventory and attempt to reduce it by marking it down. This will attract the bargain hunter as described in my other blog, Your Three Retail Customers.
The other alternative is that sales will be ahead of pace. When this trend occurs, you should try to move up shipments that are planned for future months or try to make a purchase of similar goods from your existing supplier or perhaps add a new one. When you have these opportunities, you may be able to purchase these goods at a lower than normal price due to the timing. The suppliers may have excess inventory that did not sell at its normally expected time and may sell at a reduced price to get rid of it.
The other step is to review your actual inventory against the inventory plan and see how far ahead or behind your are. Of course, your sales will have a big impact on that inventory level, but deliveries could be early or late that affect your ability to hit the inventory plan. When you need additional merchandise and some is late, then get on the phone to determine when the supplier will ship. If they cannot live up to the agreement (which is what a well-written purchase order is), then you should begin looking for alternatives.
So why does this work in changing the profitability of your shop? First, because you have a buying plan that makes fiscal sense. Secondly, because you are reacting to suppliers when trends arise that impact your inventory levels, not at the end of the season (which is probably when you overreact since it is too late to react). Third, you are reacting for your customers when trends cause you to increase markdowns to reduce. Fourth, you are receiving a constant flow of new merchandise which attracts the “early adopters” (as Jim Koppenhaver of Pellucid Corp. renamed my customers who wanted the latest products).
Remember, this is big picture stuff. You are not running a 500 page sales and margin report, but are looking at the 10-20 classifications, once a month. For my clients, I write an analysis, but some of them have moved to an automated version of my OTB and are developing the discipline to take a look at the variances each month. However, all of them will tell you that it does not take much time to do this. And remember, the alternative is to do nothing and find yourself repeating the same mistakes year after year.
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
866.32 RB101 (866.327.2101) toll-free (US)
+1 760.724.0385 direct
+1 619.723.4653 mobile
+1 760.208.4653 US Skype
+44 20 3239 9619 UK Skype
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