How to Effectively Set Up Open-to-Buy (OTB) for Your Retail Business in 2024

Are you just one poorly-planned inventory order away from a cash flow disaster? You wouldn’t be alone if you said yes.  

Against the backdrop of rising costs and an unpredictable economy, there’s less room for error with inventory than ever before. Up to 70% of new businesses fail in the first year because of poor planning and just one inaccurate inventory order can trigger a cash flow catastrophe.  

That’s where Open-to-Buy planning – also known as OTB, merchandise planning and supply planning – comes in. 

Open-to-Buy is a dynamic tool that adapts to the growth stages of any retail business. It’s critical for reducing overstock, preventing understock, and increasing profitability. 

It allows you to forecast how much you are going to sell and how much money you need to put aside to invest in goods. It also shows you if you can stay afloat while you wait for inventory to arrive, and whether your cash flow is healthy enough to place other orders (which is especially important for merchants with long lead times from overseas suppliers).  

However, implementing OTB properly is key.  

Getting started with Open-to-Buy 

There are two approaches to implementing OTB planning which you need to consider.  

Option 1: Go it alone 

There’s a formula for calculating OTB that anyone can use: 

OTB = planned sales + planned markdowns + planned end of month inventory – beginning of month inventory 

This formula involves adding together your expected sales in a given period with the value of any discounts or markdowns and the value of your inventory at the end of the month, and then taking away the value of the inventory available for sale at the start of the month. 

If it sounds tricky to get your head around, that’s because it is. Working out your OTB on your own is not for the faint-hearted and it can be complicated, tedious and error-prone. 

Option 2: Use dedicated software 

There’s a simpler, faster and more effective way to calculate your OTB: by using dedicated software. Unlike other basic inventory planning tools, Inventory Planner by Sage includes OTB functionality as standard. 

“OTB is an advanced feature of Inventory Planner, but it’s also a first step in high-level cash flow planning and inventory forecasting,” says Jill Liliedahl, Global Director of Product Marketing at Inventory Planner. 

“In the current climate, OTB is critical for merchants that want to protect their cash flow and boost their bottom line. Our customers tell us being able to create OTB plans from Inventory Planner makes a huge difference to their operations – in fact, it’s why many choose us over other inventory planning tools.” 

Which option is right for you?  

If you run a small business (revenue > £/$500K), going it alone with manual OTB formulas (aka option 1) might be a sufficient option for you.  

If you run a fast-growing SMB or a larger enterprise-level company, manual OTB formulas can’t cater for your needs. They are inaccurate, unreliable and prone to causing ordering errors – especially when used at scale. Instead, you need to select option 2. 

Introducing dedicated OTB technology is the best way to plan efficiently. Implementing OTB software, like Inventory Planner by Sage, will give you the ability to allocate budgets based on your OTB plan, as well as the ability to plan in weeks or months. You’ll also be able to factor in live POs and active marketing campaigns, along with seasonality.  

Next steps in implementing OTB 

Optimize your forecasting 

Before you begin OTB planning, it’s vital your forecasting is running smoothly and accurate. Inventory Planner has this covered with reliable demand forecasting that factors in historical sales as well as seasonality, promotions and market trends. Once you have a clear understanding of what stock is needed where and when, you can order items for the right time – without risking overstock or excess stock.

Choose whether to plan by revenue, cost or units 

Every retail business is different, which is why Inventory Planner goes further than most OTB planning tools to allow you to plan based on revenue, cost and units – or even by category, brand, or vendor. As part of your expert-led implementation, we’ll help you work out which option is best for your needs.   

Allocate cash and resources  

The next step is to define your high level promotion plan and assortment plan to allocate cash and resources for upcoming months. For very fast-growing retailers, we recommend reviewing the plan weekly. Other retailers can usually manage with a monthly review. Again, this is something our team of OTB experts can support you with.  

Benefits of OTB with Inventory Planner 

Many retailers don’t understand Open-to-Buy – and many software solution providers don’t either.  

Inventory Planner by Sage offers best-in-class OTB functionality designed by experts who properly understand Open-to-Buy and the difference it can make to your business (especially when cash flow is tricky, and stockouts or excess stock are a major risk).  

Unlike other OTB software solutions, with Inventory planner you can… 

1. Plan in retail/revenue 

Work out how much inventory to buy to meet a target revenue. 

2. Plan in cost 

Invest based on how much purchasing budget is available. 

3. Plan in units 

See exactly how many units to buy to negotiate with vendors and boost margins. 

4. Plan by category, brand, or vendor 

Enjoy complete flexibility to plan by category, brand or vendor. 

5. Factor in purchase orders (POs) 

Include incoming stock to any or all locations into your OTB planning. 

6. Factor in transfers and assembly orders 

Easily plan for specific locations by factoring in inventory in other warehouses and soon-to-be-assembled inventory. 

7. Plan using tags 

Create custom groups of products to fit the unique needs of your business. 

8. Plan in retail weeks or calendar months 

Maximize ‘like for like’ sales comparability with 4-5-4 and 4-4-5 planning, or keep it simple with calendar months. 

“One tool that I use on a daily basis is Open-to-buy because the main goal of OTB is to see how much is left for you to buy or if you are overbuying or underbuying based on your sales forecast for future months. Open-to-Buy is extremely probably, I would say the most important tool in the realm of the KPIs because it controls your cash flow. It is used as a forward plan of your sales and to know how much inventory to buy for a certain period of time.” – Laurent Cohen, VP of Operations, Rockstar Original 

Next steps:

🎥 Watch this explainer video on OTB 

🎓 Catch up on our expert-led Open-to-Buy masterclass  

🧑‍💻 Book a personalised Inventory Planner demo to learn exactly how OTB could benefit your business