Whats your OTB?

PURCHASE PLANNING
MADE EASY

Closing in on an open-to-buy budget

BY: ALAN ROSEMAN

he holiday season is over, and in addition to landing new spring merchandise, its time to start planning
your buys for next fall. But whats
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 planor budgeted amount
available for purchasescan put a shop in
better position to do that, serving as a financial fortune teller of sorts. Now lets create a
simple open-to-buy merchandise plan for
next fall to ensure foreseeable success when
you peer into that crystal ball.
CLASSIFIED
Each classication 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 classications. 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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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 doesnt 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 ll 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 years 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 dont 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 protable if those
sales were driven by excessive markdowns. Success means forecasting protable 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

1
+
+
=

Forecasted Sales
Estimated Markdowns
Projected Ending Inventory
Previous Month Ending Inventory
Open-to-Buy (at retail)
Convert to Cost

+
+
=

$1,000
$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. Its hard= 1750 X .4
er to sell last seasons outerwear in
= $700
May or June, for instance, when the
store is stocked with fresh spring/
summer merchandise. Estimating
expected markdowns is a necessary component of any open-to-buy merchandise plan.
Successful retail is a ne line between too
much and too little. The further off the line
PROJECTING INVENTORY LEVELS
you tread, the more challenging it will be to
Projecting the correct monthly inventory levels to drive protable sales is the key to your mermaximize prots. Keep in mind, this is a very
chandise plan and will have a major impact on sales, prots and your stores bank balance.
elementary planning tool and could cause
Not having the correct amount of inventory in a specic class may result in lost sales and lost
costly buying errors with the wrong assumpcustomers. On the ip side, having too much inventory could create an overstocked position
tions. Basing sales forecasts on last years
which ties up cash and can necessitate markdowns.
numbers does not take into consideration
In order to have the correct monthly inventory level to support your forecasted sales, you
industry sales trends and the high level of
will need to adjust your monthly stock-to-sales ratio. 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.
for $1,000 worth of sunglass sales in May, do you need $3,000, $4,000 or $5,000 on hand to
There are many planning tools and sersupport those sales for the month? If sunglass sales are lower during winter months, it makes
vices available, 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; and because we are
will sell faster.
talking about a large nancial investment in
inventory, you should demand accuracy for
MERCH MATH
success.
AOB
Now that we forecasted sales, estimated markdowns and projected inventory levels, it is time
to put it all together to calculate your monthly open-to-buy worksheet (see chart #1 above).
If we look at July, for example, we begin the month with $2,000 in T-shirt inventory and
About the Author: Alan
want to wind up with $2,500. Without any sales factored in, OTB would be $500. However,
Roseman has more than 35
given the forecasted sales of $1,000 and the estimated markdown sales of $250, were now
years of retail experience in
open to buy that much more to reach the projected ending inventory (see chart #2 above).
all phases of specialty store
Remember, this was all created with retail numbers and will need to be converted to cost,
retailing. In 2004, he started
which gures in the markup to reveal what can actually be spent. To compute OTB at cost,
Strategic Results with the
multiply the retail amount by the complement of the initial markup (100-IMU). For this exgoals of helping indepenample, well say that the markup is 60 percent (see chart #3 above).
dent specialty retail stores increase sales, cash
REVIEW, REPEAT
Once you have completed your simplied open-to-buy merchandise plan, dont save it someplace never to be viewed again. This plan should be reviewed and updated monthly. As the
season progresses, keep track of actual sales compared to forecasted sales; if they are not in line,
perhaps markdown strategies need to be updated or a review of remaining orders and forecasting techniques is necessary. If goals are being exceeded (without excessive markdowns), then the
possibility exists that additional merchandise may be needed to drive protable sales.

ow and prots. As a Manhattan Beach, Calif.

resident, Alan has focused on the action sports
industry and worked with many surf, skate and
snow retailers. Alan has had many articles published as a guest writer for TransWorld Business
and has also presented many seminars for BRA
Boot Camps and Certication Programs. alan@
strategic-results.biz; www.strategic-results.biz.
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