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How Can Open-To-Buy Planning Improve Your Inventory Management?

Businessman working at a touchscreen

An ever-changing retail landscape requires flexible inventory management, an objective possible through open-to-buy planning.

Open-to-buy planning refers to budgeting merchandise costs that align with sales forecasts. It’s an aspect of inventory management that can help you to effectively control inventory during seasonal periods.

A retail software solution can help retailers put the pieces in place to create open-to-buy budgets that meet the needs of flexible inventory management.

First, retailers should identify how much they spend on inventory and its turnover rate. In other words, evaluate the success of your inventory buying decisions. Although retailers incur several fixed costs like overhead, rent and employee salaries, one expense they do have considerable control over is how much inventory to buy and how much to sell it for.

While you plan to sell every item you stock, sometimes you end up with excess inventory. In these cases, some retailers are willing to steeply discount the products in order to move the inventory off the shelves, believing that there are always customers who are willing to buy at any given price.

But retailers must diligently manage and monitor what they buy and how well products sell. Again, this has the most dramatic impact on a retailer’s bottom line. Retailers must stay on top of inventory sales performance, which is vital in identifying if a product isn’t selling as expected.

Monitoring sales inventory performance lays the foundation for open-to-buy planning. A retail software solution can help to establish an open-to-buy budget, guiding your buyer to purchase items that will meet budgetary goals and establishing flexible inventory management during seasonal sale periods.

Here’s an example of how open-to-buy planning works: For the first quarter, the store’s sales forecast planner specifies $40,000 target for men’s belts. Taking away the current inventory retail value of $5,000 leaves $35,000 in an open-to-buy budget. That’s the amount the buyer should purchase to meet the quarter’s sales goal.  

The buyer then makes his initial purchase of belts. Let’s say that $3,500 — $2,000 of style A and $1,500 of style B. Periodically, the buyer then analyzes the sales performance for each belt style. Is each style selling as high as expected? Or is one selling better than the other?

This helps buyers to identify which men’s belt style to reorder. For example, a buyer discovers that one particular belt style sold out in three weeks, but the other belt style has leftover stock two months later. When allocating dollars within the open-to-buy budget, the buyer should adjust future inventory purchases accordingly. It could also be the case that neither belt sold as projected, and the buyer decides to invest his budget into another style.

Open-to-buy plans should be adjusted frequently to reflect current internal and external conditions. For instance, if a retailer experienced better-than-expected sales in October, a revised open-to-buy budget should be amended to reflect those numbers. Likewise, if sales were lower than expected, an open-to-buy budget should reflect that change.

Establishing a budget lays the path toward a financial goal. In retail, an open-to-buy budget paves the way to meet customer demand and maximize profit margins in an ever-changing retail environment.