Open-to-Buy Planning: A Retailer’s Guide to Optimizing Inventory and Cash Flow

Imagine a bustling retail store where customers are eagerly searching for the latest trending items, only to find empty shelves. Or perhaps a stockroom overflowing with unsold merchandise, gathering dust and draining valuable resources. These scenarios highlight the critical importance of effective inventory management in the retail industry.

Open-to-Buy (OTB) planning is a powerful tool that empowers retailers to strike the perfect balance between having enough inventory to meet customer demand and avoiding the costly pitfalls of overstocking or understocking.

This strategic approach ensures optimal stock levels while preserving precious cash flow. In this blog post, we’ll delve into the intricacies of OTB planning, exploring its benefits, challenges, and the transformative role of technology in modern retail.

What is Open-to-Buy (OTB) Planning?

Open-to-Buy (OTB) planning is a critical process for retailers aiming to strike the perfect balance between meeting customer demand and managing their inventory investment. It involves forecasting sales, setting merchandise plans, and strategically allocating inventory purchases to ensure you have the right amount of stock on hand – not too much, not too little.

Think of it as a budgeting strategy for your inventory. Just like you wouldn’t overspend on your personal budget, OTB helps you avoid tying up excessive cash in unsold goods. It acts as a financial roadmap, guiding retailers in making informed purchasing decisions.

At the heart of OTB planning lies a simple yet powerful formula:

(Planned Sales + Planned Ending Inventory) – (Current Inventory + On-Order Inventory) = Open-to-Buy

Diane Sherwood, SVP Global Services at Algo, explains it this way:

Think of the OTB formula as a balancing act. On one side, you have your desired outcome: how much inventory you want to have on hand at the end of the month, plus how much you expect to sell. On the other side, you have your current reality: what’s already sitting in your warehouse or on its way. The OTB formula simply calculates the difference between these two, telling you exactly how much more you can buy to hit your targets without overspending.

This formula empowers retailers to determine precisely how much inventory they can purchase within a specific period, ensuring they have enough stock to meet anticipated demand without overspending.

Why Open-to-Buy (OTB) is Critical for Retailers

OTB planning is far more than just a budgeting exercise; it’s the cornerstone of successful retail operations. Says Diane Sherwood, Algo’s, SVP Global Services.

By providing a structured framework for inventory management, OTB empowers retailers to achieve a delicate balance between meeting customer demand and optimizing financial resources. Here’s how:

Managing Inventory Levels

“OTB takes the guesswork out of inventory management,” says Diane Sherwood, SVP, Global Services at Algo. “Instead of relying on gut feelings or outdated methods, OTB provides a data-driven framework for making informed purchasing decisions.”

Here’s why it works:

• Demand Forecasting: OTB incorporates accurate sales forecasting, leveraging historical data, market trends, and even external factors like weather patterns to anticipate future demand. This allows retailers to proactively plan their inventory needs instead of reactively ordering based on past performance.
• Inventory Optimization: By considering current stock levels, incoming orders, and planned sales, OTB calculates the precise amount of inventory needed to meet demand without overbuying. This prevents the accumulation of excess stock that can lead to markdowns and tie up valuable capital.
• Dynamic Adjustments: OTB isn’t a static plan; it allows for real-time adjustments based on actual sales performance and changing market conditions. This flexibility enables retailers to adapt quickly to unforeseen events, ensuring they can consistently meet customer demand.

“By accurately forecasting sales and planning inventory accordingly, retailers can avoid the costly pitfalls of overstocking and understocking,” she adds. This translates to fewer stockouts, reduced markdowns, and ultimately, increased customer satisfaction.

Maintaining Cash Flow

Perhaps the most significant advantage of OTB lies in its direct impact on cash flow.

Diane shares, “We had a client that was struggling with excess inventory that was draining their cash reserves. By implementing an OTB plan and leveraging our AI-powered forecasting tools, they were able to free up significant capital, allowing them to invest in new store locations and expand their product offerings.”

But how exactly does OTB achieve this?

Here’s the breakdown:

• Preventing Overspending: OTB sets a clear budget for inventory purchases, preventing retailers from overspending and tying up excessive cash in stock that might not sell quickly. This ensures that funds are available for other essential business operations, such as marketing, rent, and payroll.
• Minimizing Inventory Holding Costs: By optimizing inventory levels, OTB reduces the costs associated with storing, managing, and insuring excess inventory. This frees up cash flow that can be reinvested in the business.
• Reducing Markdowns: OTB helps prevent overstocking, which often leads to markdowns and reduced profit margins. By maintaining optimal inventory levels, retailers can sell products at full price, maximizing revenue and improving cash flow.
• Improving Inventory Turnover: OTB promotes a healthy balance between sales and inventory levels, leading to improved inventory turnover. This means that products are sold more quickly, generating revenue and improving cash flow.

OTB prevents retailers from tying up excessive cash in unsold inventory, promoting better liquidity and financial flexibility. This agility empowers businesses to make strategic decisions, seize growth opportunities, and navigate market fluctuations with greater confidence.

Aligning Purchases with Sales Forecasts

OTB planning hinges on accurate sales forecasting. But it’s not just about plugging numbers into a spreadsheet; it’s about deeply understanding your market, your customers, and your business.

By leveraging historical data, market trends, and promotional calendars, retailers can anticipate future demand and align their purchasing strategies accordingly.

Here’s how this alignment drives success:

• Optimized Inventory Levels: Accurate sales forecasts enable retailers to purchase the right amount of inventory, minimizing the risk of overstocking or understocking. This ensures that products are available when customers want them, without tying up excessive capital in unsold goods.
• Improved Inventory Turnover: By aligning purchases with anticipated demand, OTB helps optimize inventory turnover. This means products are sold more quickly, generating revenue and freeing up space for new merchandise.
• Increased Profitability: Aligning purchases with sales forecasts leads to increased profitability. Retailers can avoid markdowns caused by excess inventory and capitalize on sales opportunities by having the right products in stock at the right time.
• Enhanced Customer Satisfaction: When retailers consistently have the products customers want, it leads to increased customer satisfaction and loyalty. This positive experience translates to repeat business and positive word-of-mouth referrals.
• Data-Driven Decision Making: OTB empowers retailers to make data-driven decisions about their inventory investments. This strategic approach reduces reliance on guesswork and intuition, leading to more informed and effective purchasing strategies.

This ensures a healthy balance between planned sales and inventory turnover, optimizing profitability and minimizing holding costs.

4 Common Challenges in Implementing OTB and How to Overcome Them

While OTB offers significant advantages, retailers often face hurdles during implementation. Here are some common challenges and how to address them:

1. Forecasting Errors

   Inaccurate sales forecasts can derail your entire OTB plan. As the saying goes, “garbage in, garbage out.”

   To ensure your forecasts are reliable and robust:

   • Embrace Advanced Forecasting: Move beyond basic spreadsheets and historical data. Explore advanced analytics, machine learning, and AI-powered forecasting tools that can uncover hidden patterns and predict demand with greater accuracy.
   • Diversify Your Data: Don’t rely solely on past sales. Incorporate market trends, seasonality, planned promotions, competitor activities, and even external factors like weather patterns and economic indicators. The more comprehensive your data, the more accurate your forecasts.
   • Continuously Refine and Adapt: The retail landscape is constantly changing. Regularly review and adjust your forecasting models based on actual sales performance, new information, and evolving market conditions. Treat forecasting as an ongoing process of refinement, not a one-time event.

2. Poor Communication Across Departments
   

   OTB is a team sport. Silos between buyers, merchandisers, and finance teams can sabotage your efforts. To foster collaboration:

   To ensure your forecasts are reliable and robust:

   • Establish clear communication channels: Implement regular meetings, shared dashboards, and collaborative planning tools to keep everyone informed and aligned.
   • Define shared goals and KPIs: Ensure that all departments understand the overall OTB objectives and how their individual roles contribute to success.
   • Integrate systems: Connect your OTB system with other critical platforms like POS, ERP, and marketing automation tools for a holistic view of your business.

3. Data Integrity
   

   “Data integrity is paramount for effective OTB,” says Diane. “Inaccurate or incomplete data can lead to flawed forecasts and poor decision-making.”

   Ensure your data is:

   • Accurate: Regularly audit and cleanse your data to eliminate errors and inconsistencies.
   • Complete: Capture all relevant information, including product attributes, supplier details, and customer demographics.
   • Consistent: Standardize data formats and definitions across all systems and departments.

4. Lack of System Flexibility

   Rigid OTB systems simply can’t keep pace with the dynamic nature of retail. They lack the agility to handle unpredictable demand shifts, fierce competition, supply chain disruptions, promotional activities, and evolving customer preferences. To thrive in this environment, choose an OTB solution:

   • Allows for real-time adjustments: Respond quickly to unexpected demand shifts, promotions, or supply chain disruptions.
   • Supports what-if analysis: Explore different scenarios and assess their impact on your OTB plan.
   • Offers customizable reporting: Gain insights into key performance indicators and track progress towards your goals.

Ready to unlock the full potential of OTB?

Open-to-Buy planning isn’t just a nice-to-have; it’s essential for retailers looking to thrive in today’s dynamic market.

By combining accurate forecasting, streamlined processes, and advanced technology, you can:

• Optimize Inventory: Say goodbye to overstocking and stockouts.
• Boost Cash Flow: Free up capital and improve your financial flexibility.
• Drive Profitability: Increase sales and reduce costly markdowns.

And with the rise of AI-powered solutions, OTB is becoming even more powerful.

• Predictive Analytics: Anticipate demand with unprecedented accuracy.
• Automated Decision-Making: Optimize inventory in real-time.
• Personalized Recommendations: Cater to individual customer needs.

Overstocked? Understocked? Struggling to keep up with demand? Request a demo of Algo’s AI-powered solutions and transform your inventory management today!