In all types of businesses, it’s useful to measure performance against a set of predetermined criteria. An open-to-buy plan is an inventory management tool that helps you figure out how much inventory you need to buy on a monthly basis to make your sales projections.
Most retailers use product categories for planning rather than analyzing hundreds of individual products. This is possible because products in a category usually behave in a similar fashion. To create a plan you should set the planned revenue by month and the desired opening stock.
In this example
- the actual opening stock for the current month was $424,340
- the desired opening stock for the next month is $500,000
- planned revenue is $200,000 and $250,000 respectively
The open-to-buy budget for the current month is computed using the following formula:
Open-to-Buy (OTB) = Closing Stock + Planned Sales - Opening Stock - Purchases
For the example above it's $272,932 which is the stock retail value that is needed to generate $200,000 as the revenue and start the new month at $500,000.
Planned sales can be seeded automatically from the last year or the forecasted sales.
To get the most accurate open-to-buy plan, the opening stock should be set correctly.
Let’s say you plan to generate $100,000 of revenue for the next month. You may think you need to hold just $100,000 worth of products in your warehouse, but in reality it’s not true. You always sell a percentage of your stock, not all products contribute to the revenue and therefore you need to have more than your planned sales. Stock to sales ratio represents this difference and is computed as following:
Stock to sales ratio (SSR) = Opening Stock / Planned Revenue
E.g. when SSR is 2 it means you will sell every second product of your inventory this month. It also can be seen as the inverse of sell through.
Inventory Planner allows you to create open-to-buy plans in cost and units. Planning in inventory cost gives you the actual budget to spend on each category. Planning in units helps you to estimate if you have capacity in your warehouse.
To get the OTB in cost, go to Open-to-Buy (cost) tab and set the planned margin for future months
To get the OTB in units the average product price should be set.
If you’d like to exclude obsolete categories from planning use Plans -> Category Organizer.
You can also create different versions of a plan for “what-if” analysis. It helps to simulate what will happen if you have more sales or your stock days changes. Retailers use this modeling to understand the impact of moving performance variables and their impact ultimately on cash flow.