Chapter 3: Buying Practices

The Open-to-Buy System

The "open-to-buy" (OTB) system represents the buyer's best control mechanism for adjusting inventories due to changes in actual sales from the original plan. Usually calculated on a month-by- month basis, this OTB number must be accurate and timely in order to maximize profits (if sales are higher than planned) or to minimize markdowns (if sales are less than projected). In extreme cases, cash flow crises may arise if inventories are not scaled back when sales are soft.

The "Purchases" figure from the six-month merchandise plan is all OTB until an order is written. Each order then decreases the OTB account for the particular month in which delivery of stock is expected.

Depending on company policy, buyers will not spend all of their OTB for each month. Common practice is to leave dollars available for opportunity purchases and to act as a buffer if sales do not reach plan.

The actual amount of the OTB account left in reserve will vary from month to month. A common practice is to retain a higher percentage of OTB dollars in the latter months of a season. The reason for this is that we want all possible chances to meet and exceed sales projections, so inventory selection has to be at its best early on in the season. In the event that sales become weak in the early months of the season, we have the option of making adjustments if sufficient OTB dollars remain unspent in the later months.

Depending on the type of retail concept (i.e. high fashion), stock fill-ins during the season may not be an option because all goods are manufactured to order and inventory requirements must be 100% booked. In this scenario, OTB is not a factor and therefore initial purchases have to be well-planned.

To maintain an open-to-buy reporting system, the following information is needed for each month of the season:

• Planned sales projections.
• Actual sales.
• Planned end of month inventory.
• Actual end of month inventory.
• Planned markdowns.
• Actual markdowns.
• Outstanding purchase orders.

The formula for calculating monthly OTB is as follows:

OTB = Planned EOM Inv.
         + Planned sales
         + Planned Markdowns
         - Outstanding orders
         - Planned BOM Inventory

From the sample open-to-buy form shown below, we can calculate the OTB for August as follows:

OTB August = $110,000 + $35,000 + $2,800 - $70,000 - $50,000
= $27,800

Planned Open-to-Buy

Department:     Class:     Season:     Date:

		Months						Season Total
		Aug.	Sept.	Oct.	Nov.	Dec.	Jan.
B.O.M.Inventory
	Planned	$50,000	$110,000	$140,000	$150,000	$170,000	$140,000
	Actual
Sales
	Planned	$35,000	$55,000	$40,000	$45,000	$85,000	$50,000	$310,000
	Actual
Markdowns
	Planned	$2,800	$4,400	$3,200	$3,600	$6,800	$14,000	$34,800
	Actual
Outstanding Orders		$70,000	$61,300	$29,600	$48,900	$45,500	$0	$253,400
E.O.M.Inventory
	Planned	$110,000	$140,000	$150,000	$178,000	$140,000	$90,000
	Actual
Open-to-Buy	$27,800	$28,100	$23,600	$21,600	$16,300	$14,000	$131,400

Stock replenishment is affected by the following factors:

1) Predicted Rate Of Sales

How fast a particular item is selling and predictions for this rate to increase, decrease or remain the same.

2)Frequency Of Information

How often are we getting information from sold records and in-stock lists from the stores? Compared to manual systems, the advantage of computerization and the daily information it provides is tremendous.

3) Lead Time For An Order

How fast can an order be processed in-house, sent to the supplier and received back in stores?

4) Customer Service Level

How many times out of ten is it acceptable to tell a customer "Sorry, we're out of stock"? This is a management decision about the level of service your store is trying to provide for the customer.