Question

Creating an Open-to-Buy plan can help you carefully manage merchandise across the business for the year. By using an open-to-buy plan, your able to find areas within your retail organization where you can save money to invest in other areas of the business. Using the Open-to-Buy Formula, calculate the dollar amount a 15% cost-savings would allow you to invest in another area of the business if you currently have $155,000 devoted to inventory.

6 Month OTB Plan	June	July	August	September	October	November
Beginning of the Month Inventory	$155,000	$150,000	$152,000	$157,000	$157,000	$165,000
Sales	$47,000	$48,000	$50,000	$50,000	$52,000	$48,000
Markdowns	$1,000	$750	$750	$1,000	$1,500	$1,000
Open - to - buy (at retail)	$43,000	$50,750	$55,750	$51,000	$61,500	$37,000
Open - to - buy (at cost)	$17,200	$20,300	$22,300	$20,400	$24,600	$14,800
End of Month Inventory	$150,000	$152,000	$157,000	$157,000	$165,000	$153,000

Answer 1

Open-to-buy (OTB) is an inventory management system that works with your retail business. OTB Planning is designed as a cash flow planning tool. It is the amount that a retail store can buy during a specified time period. This tool helps to determine the amount of inventory. OTB can be calculated in either units or dollars. However, it is best to use dollars, as there are significant variations in costs between products.

Inventory control is critical to ensuring an adequate level of stock in hand for the number of sales made. If a merchandiser is having excessive inventory or the wrong type of inventory during certain periods can slow cash flow and reduce profits with too many markdowns.

Formula to calculate:

Open-to-Buy (OTB) Retail

Open-to-Buy (retail) = Planned Sales + Planned Markdowns + Planned End-of-Month Inventory - Planned Beginning of Month Inventory

Open-to-Buy (OTB) Cost

Open-to-Buy (OTB) Cost = Multiply the OTP (Retail) number by the initial markup.

Inventory Turnover

While creating an OTB budget, it involves planning of inventory turnover also. Inventory Turnover is a calculation that identifies how fast you sell through inventory and when you need to replace it.

Inventory turnover formula

Turnover Rate = Sales / Inventory

DECISION:

Before implementing OTB plan into operation, make sure each number is realistic and make sense for the way you do business. Always keep in mind that many of the figures in inventory plan are only guidelines. A guideline is that if actual ending inventory is within 5% of plan, then it is well for the business.

Every year, merchandisers close their shops mainly because their inventory is not properly managed. There is mismanaged inventory. One of the biggest factors to retail mismanagement is the lack of an Open-to-Buy system. Analyse the open-to-buy plan at every fix interval so as to know how much inventory to buy or manufacture so that cash flow remains positive always.

6 Month OTB Plan		June	July	August	September	October	November
Inventory Beginning of the Month	A	155000	150000	152000	157000	157000	165000
Sales	B	47000	48000	50000	50000	52000	48000
Markdowns	C	1000	750	750	1000	1500	1000
open-to-buy (at retail)	D	43000	50750	55750	51000	61500	37000
open-to-buy (at cost)	E	17200	20300	22300	20400	24600	14800
Inventory End of the Month	F	150000	152000	157000	157000	165000	153000
THROUGH FORMULA
open-to-buy (at retail)	G = B+C+F-A	43000	50750	55750	51000	61500	37000
open-to-buy (at cost)	Assume 40% Initial Markp Unit (G*40%)	17200	20300	22300	20400	24600	14800