Open-To-Buy: A Living Process in Retail Planning

Open-To-Buy: A Living Process in Retail Planning

Imagine you are a leading a merchandising team in the retail industry.  Your team’s main role is to supply your retail stores with the right amount of product, within a specific budget, to meet a forecasted demand. However, as time progresses some retail stores may experience inventory shortages. The challenge then becomes determining where to spend residual budget to accommodate these inventory deficiencies through a process called open-to-buy (OTB) planning. As current inventory levels do not always provide an accurate picture of supply shortages, OTB helps your planners navigate the multiple variables of the equation. Leveraging a tool like Anaplan, teams are able to weigh all factors simultaneously and determine an accurate, detailed supply distribution with the remaining monthly budget.

So What is Open-to-Buy Planning?

As previously stated, merchandise planners decide how to supply retail stores with inventory based on a budget provided by Finance.  A demand planner provides an initial monthly forecast to serve as a roadmap to reach the monthly expectation; however, what is expected does not always equal what is actualized and the merchandise planner will not spend their entire budget in the first week.  Instead a residual of the budget is left to be used later in the month.  As the month progresses, deciding where to spend this remaining budget gets tricky. Inventory is always in motion and different reports from a variety of sources show different retailers or regions “in need” of supply. Open-to-buy (OTB) is a process within retail forecasting where planners determine how to effectively use the remaining budget to send inventory where they see demand. This process is not so simple. A merchandise planner cannot blindly choose to divide the remaining budget by the most popular product and evenly distribute the balance to all stores. Similarly, they cannot just allocate to the store that sees the highest foot traffic or the first store on the list with a gap in inventory.  Those decisions would be based on a singular factor, rather than the full supply picture. Instead, this process requires a detailed assessment of all inventory and needs to be shipped in the context of missing potential sales. The complexity and time involved in managing multiple dimensions of OTB planning is a challenge for merchandise planners. This is where Anaplan simplifies the process to ultimately allow the planner to effectively supply retailers.

The Process of Open-to-Buy Planning

When starting OTB planning, the merchandise planner needs to first determine where they want inventory to begin for the following time period. What is important about determining the final inventory goal at the end of the month is that the team does not to strive to empty the shelves and leave retailers with no supply. Instead, each retail store begins the month with the residual inventory from the month before, which is planned for by merchandise managers. Using this starting balance, the merchandise planner factors in the necessary variables into the equation. Examples of common inventory variables are (a) how current sales are compared to expected forecast, (b) planned markdowns that are scheduled during the current time period by marketing or finance, and (c) what merchandise has already been purchased and is currently in route to retail stores. With these variables combined with the target end goal, the planner can calculate the OTB.

Calculation ($)

End of Month (forecasted stock level goal)

+ Sales (monthly actuals)

+ Markdowns (monthly actuals)

– Beginning of Month (existing stock level– not in new budget expenses)

– Merchandise on order (inventory in transit to the retail stores)

—————————————————————————————-

= Open-To-Buy (remaining amount available for new purchases)

 

When under control, open-to-buy will narrow down inventory gaps that need to be addressed from those already being resolved with previous expenses. With Anaplan, OTB can easily be applied at a top-level calculation or it can pushed down to address constrained supply in markets or individual stores. For example, a merchandise planner can see that Denver as a region is performing above forecast while also determining  the demand is originating from one individual store. Had the planner stopped analysis at the Denver market level, he or she could have sent too much inventory to stores in the region that do not have the same supply constraints as the high demand store. Furthermore, the Denver store could already have replacement inventory en route, or have a promotion in that region to begin an end-of-life cycle for that retailer. Open-to-buy helps tell the story of retail demand so the planner can quickly identify the stores in need from those that are just temporarily out of balance.

Why Use Anaplan for Open-to-Buy Planning?

The Anaplan platform accommodates the multidensional demand associated with OTB planning.  When determining data points originating from multiple sources, Anaplan can start by identify stores with potential demand while also accounting for incoming inventory that has already been shipped. The system will can also forecast how markdowns scheduled to happen will impact the retail store inventory. With the combination of data from multiple direct inventory sources, the open-to-buy budget can be effectively spent or saved accordingly. Anaplan’s Connected Planning platform offers a means for merchandise planners to delineate individual store demands apart from how their region or market is performing.

Combining an open-to-buy process with Anaplan can instill confidence in retail store inventory control by allowing for planning to continue throughout a month. Inventory control professionals in the retail store will be able to see that incoming shipments are addressing their inventory gaps, but also know that corporate merchandise planners will not send more inventory than their back-of-house and front-of-house can handle. Supply will not age or expire on the shelf and inventory levels will be controlled for the following month.

Spaulding Ridge combines years of experience in retail fulfillment with modern cloud-based technology expertise to help clients efficiently adapt to dynamic inventory planning. We offer personalized solution for businesses looking to streamline their processes and address needs. To learn more contact the author, Kait Chura, at kchura@spauldingridge.com.

 

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