Open-to-buy inventory management key for retailers
Have you heard of open-to-buy (OTB) inventory management? OTB management is an essential tool for running a healthy business. But what exactly is OTB, and why is it so important?
According to a Harvard Business School study, 7 to 21% of consumers facing a stockout will keep shopping but not purchase a substitute product, while 21 to 43% of consumers will go to another store to purchase the desired item. These numbers reveal that retailers can potentially lose nearly half of their planned purchases when a customer experiences a stockout. Inventory management is a core component of a successful retail store, and OTB’s goal is to help you get your stock right.
OTB management is an inventory-planning method used by retailers to better determine what products to order and how much of each is needed. It involves making plans for upcoming sales and markdowns, as well as accounting for the beginning and ending inventory levels each month.
If you want to learn more about OTB inventory management, you’re in the right spot. Let’s dive right in.
What is OTB Management?
OTB is a formula used in retail inventory management. It refers to the amount of money left in your budget for inventory purchases, essentially determining how much of your merchandise you should buy for the upcoming season or month. In short, it’s the amount of inventory you must purchase throughout a given time period.
Calculating this helps retailers to manage stock levels, predict what products will sell and make informed decisions about buying and stocking new merchandise.
How to Calculate OTB
The formula used to calculate OTB is: OTB = planned sales + planned markdowns + planned end-of-month inventory − beginning-of-month inventory.
Let’s say your store plans to have $40,000 in sales for the month of June, along with $20,000 in markdowns, and you anticipate having $10,000 in inventory at the end of the month. The store also starts the month of June with $30,000 in inventory.
By plugging these numbers into the formula, the store’s OTB for June is $40,000, meaning the store can purchase up to $40,000 worth of merchandise to replenish its inventory for the month ahead.
Benefits of OTB
Every retail store owner knows the importance of keeping inventory levels on point. It helps to maximize profits by having all products in stock while avoiding the costs associated with overstocking. OTB inventory planning is a major part of overall retail inventory management — it allows store owners to plan, forecast and manage their inventory according to their sales goals.
OTB offers several benefits to help you run your retail business more efficiently. One benefit is a realistic, achievable goal for restocking merchandise. By accurately accounting for sales figures, markdowns and future orders, you can develop an OTB plan that ensures you always have the right amount of stock on hand.
Another benefit is increased flexibility when managing inventory. With OTB, you have an accurate view of how much money is available in your budget for new purchases and how much merchandise you need to replenish each month. This real-time information allows you to make adjustments as needed, which helps maximize profit potential and reduces risk.
Finally, OTB helps stores maintain better relations with suppliers by clearly indicating how much inventory will be needed each month. This minimizes any problems associated with overcommitting or under-committing to certain vendors and creates a more favorable working environment between retailers and suppliers.
Creating an Effective OTB Plan
Retailers should take several steps to ensure success in their OTB plan:
- Analyze past sales data to develop an accurate forecast for upcoming periods. This will determine how much inventory will be needed in future periods.
- Calculate current stock levels to determine how much space is available for new product purchases. This will help them identify ideal timeframes for buying.
- Set realistic goals for OTB plans that are attainable and manageable. This will help them make sure that there are adequate funds leftover for other business investments.
- Optimize stock according to customer demand. This will ensure that their store has the right mix of merchandise that customers want.
- Monitor sales trends and adjust OTB plans accordingly. This will prevent any issues with understocking or overstocking.
When it comes to managing OTB inventory, there are certain challenges that store owners face; knowing these challenges can help to create a more effective plan.
- Limited resources: One of the biggest challenges with OTB is having the resources to implement it successfully. This is especially true for small retailers who may not have the budget for tools or software to help manage inventory and accurately calculate their OTB.
- Estimating sales and trends: Another challenge is being able to estimate future sales and patterns accurately. OTB is based on historical sales data. Still, if you cannot predict how customer trends will change, then it’s difficult to determine your optimal inventory levels at any given time.
- Too much focus on inventory: Relying too heavily on OTB can cause you to focus too much on your inventory levels at the expense of other factors such as merchandising, customer service or experience. This can lead you away from maximizing profits and customer satisfaction, which should be your ultimate goal as a retailer.
Solutions to Maximize Results
Now that you understand the basics of OTB inventory management, let’s focus on maximizing results. Here are some tips to help you get the most out of your OTB:
- Create a clear plan. Create a plan for how and when you want to buy and replenish inventory. This will make it easier to manage the ebbs and flows of your store’s daily demand and future supply needs.
- Allocate appropriate funds. Ensure you set aside enough funds in your budget to cover current and future buying needs. Not having enough money can strain your cash flow, so ensure you have an adequate cushion to help with any unexpected costs or delays.
- Track your results. Finally, remember to track your OTB results so that you can adjust and modify them as needed. Pay attention to what is selling well and when, as well as what isn’t selling and why. Make adjustments accordingly to ensure optimal results in future ordering cycles.
By following these tips, you can be confident that the performance of your OTB inventory management system is meeting both current needs and future expectations for sales growth.
What Type of Retailer Is OTB Suitable For?
OTB planning is a replenishment tool used by many businesses, but not all commodity categories are appropriate for it. Industries with regularly changing products can benefit the most from OTB. Retailers with many SKUs, such as clothing and liquor stores, find OTB helpful, too.
Additionally, it’s beneficial for seasonal businesses — wherein retailers need to buy inventory in advance and decrease supply as time moves on. However, OTB is not designed for items like perishables, toiletries, snack foods or any everyday items. It’s better to use an automatic replenishment schedule since they consistently sell throughout the year without any significant sales fluctuations.
OTB inventory management can be an excellent tool for retailers. It allows store owners to manage inventory more efficiently in order to maximize profits. However, it is not a one-size-fits-all solution, and there are limits to what it can do. It should be used in conjunction with other inventory-management techniques and strategies to ensure the best results.
With the right plan and knowing your limits, OTB inventory management can help save money, prevent overbuying and optimize profits. By leveraging the right mix of OTB and other inventory-management measures, retailers can create a compelling, profitable inventory plan. By using the right software, the process can become even easier.
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