Open To Buy( OTB)

Rajnish Kumar

Why OTB ?

It has a Financial and a merchandising purpose

• Helps in optimizing working capital requirement• Gives the customer what she wants not what you have

in stock• Takes cognizance of business environment • Dynamic system that adjusts as per the sales and stock

position• Enhances profits by lowering Markdowns

Key Elements

• Sales Forecast – An estimation of sales during the Fianancial period broken by weeks,months,Qtrs etc taking view of the sales history and seasonality.The numbers would roll up to the Gross sales given in the Financial Budget

• Stock Cover – Usually spoken about in terms of sales periods such as 3 months stock and is decided on the basis of the product category, Footfalls etc.Sometimes also called as Inventory cover.

• Required Stock –Refers to stock holding or the stock required to optimize Sales.It is the addition of Sales forecasts of the following periods based on what is the cover.

• Opening stock – The stock held by the system at the beginning of the calculation period.

• Closing stock – The stock held by the system at the end of previous period.It could be the stock at the end of a certain financial period.

• Intake – Simply the difference between the Required stock and the opening stock

• On Order – Receipts due in the given period

• Open to Receive – Difference between Intake required and what is already on order.

An exampleOTB Calculations

TermPeriod

1 Period 2 Period 3 Period 4 Period 5 Period 6

Sales Forecast 100 150 200 150 100 100

Periods cover 3 3 3 3 3 3

Required Stock 500 450 350 300 300 300

Opening Stock 200 500 450 350 300 300

Intake 400 100 100 100 100 100

On Order 200 100

Open To Receive 200 0 100 100 100 100

Closing Stock 500 450 350 300 300 300

Note – Intake matches with the sales during the period i.e. purchases match the sales

Flat or forward cover - Which is Better? • In an ideal world we would order merchandise exactly when the previous

stock is sold out. In reality it is impossible to forecast demand so accurately, and if we allow stocks to fall to near zero at, for example, a product group level, we have stock outs and lost "eye appeal".

• Lead times and re-order cycles therefore become significant to the success of the merchandising process

• Your reorder cycle will be determined by the lead time for supply of products. In essence these will be equal but could differ based on logistics issues such as processing time at the DC, In Transit time etc. Which essentially means that if you could get supplies on a weekly basis you would like to order at the same frequency thus minimizing inventory and not losing any sales.

• A flat cover would work better for products for which the demand is stable and homogenous such as grocery and FMCG products

• A Forward cover would be more suited for products which exhibit strong seasonality such as Fashion Apparel, Footwear etc. Demand increases with onset of season, Festivals ,Events etc. Failure to take a view of these fluctuations in demand may lead inefficient inventory position.

OTB in Units, Sales Value COGS ?• To each his own is the mantra …• Creating a unit based open to buy means that the output

can be related to logistical constraints such as warehouse and store capacity

• For financial control it appears more appropriate to use values.

• As sales are made at retail the most common approach is to create a retail value based sales forecast and generate a retail value of open to receive plus stock in hand.

Caution !!• It is important to calculate OTB in the same measure

when we look at the Sales and Stock numbers. It will be inappropriate to have sales forecast at Retail and evaluate stock and open orders at Cost.

In Season Stock Management

Reforecast based On measurement of actual Sales

and Stock position

Review and update OTB at Sub Cat

Level

Intake based onSales and Stock

Budget

Lower than plan SalesDelivery Failures

Increase in Budget

Sell Thru %Store Comps

Sub Cat level Sale mapping

Action Plan

What to do ? Sales Higher than Plan

• Rush Existing orders and place more orders for the same product

• If same product is not available look for similar products that can replace them

• Consider Inter store Transfers if the sales are uneven and move stocks from stores with higher stock to those where the stock has fallen below optimum level

• Plan for higher qty’s ,more suppliers. Evaluate capacities and Supply chain

Sales Lower than Plan

• Cancel/renegotiate/defer existing orders

• Inter store Transfers from low sales stores to higher sale stores

• Drop Brands, Suppliers, Product lines if the overall performance is not satisfactory

• Investigate • Product, Price and Quality• Appropriateness, Design etc.

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