How to Create an Open-to-Buy Template for Your Retail Business

Nailing retail success boils down to one thing: an efficient inventory game. But figuring out the sweet spot for stocking up to meet demand without holding a bunch of extra inventory is easier said than done.

That’s where open-to-buy planning comes into play—a strategic approach that empowers you to accurately forecast needs, spend smartly based on sales, tackle the hype around popular stuff, and gear up for seasonal rushes.

With a killer open-to-buy plan, you can effortlessly keep tabs on what’s in stock versus what you actually need. Translation? Say goodbye to blowing cash on excess stuff and cutting down on waste.

If you’re unsure about how to initiate the process, we’ll guide you through the steps to create your own open-to-buy plan, helping your business stay on course for not just survival, but sustained success.

What is open-to-buy?

Open-to-Buy or OTB is a strategic inventory planning approach retailers use to determine the optimal amount of inventory to purchase—be it in units, cost, or revenue. It’s a key tool for managing the supply chain to align with demand, allowing retail businesses to achieve both financial objectives and service goals.

An OTB plan starts by establishing revenue goals for upcoming periods, taking into account the current and expected stock orders to ensure that the retailer maintains an adequate inventory level to meet projected sales.

Inventory Planner’s adaptability allows businesses to choose the OTB strategy that aligns best with their goals and constraints, whether it’s revenue-focused, cost-conscious, or unit-driven.

• Retail or revenue-based planning: Ideal when there’s a revenue target to achieve, this approach ensures sufficient inventory is available to meet the specified sales goal.
• Cost-based planning: Tailored for situations where there’s a fixed budget for inventory expenditures, this method focuses on effective planning within the given financial constraints.
• Unit-based planning: Suited for scenarios where planning is based on forecasted unit demand, the open-to-buy amount is used to negotiate favorable costs with suppliers and set target retail prices.

OTB formula

The OTB formula breaks down like this:

OTB = Planned Sales + Planned Markdowns + Planned End-of-Month Inventory − Beginning-of-Month Inventory

Let’s simplify the jargon:

• Planned sales: Anticipated retail sales in a given timeframe.
• Planned markdowns: Total planned discounts during the sales period.
• Planned end-of-month inventory: Projected inventory balance (in dollars) at the month’s end.
• Beginning-of-month inventory: Inventory total (in dollars) available for sale at the start of the month.

The end goal? To figure out the Planned OTB Purchases—the dollar amount a store plans to spend to restock after the sales period.

Example open-to-buy plan

Suppose a tech gadget retailer kicks off the month with $80,000 worth of inventory and aims to wrap it up with a cool $90,000 by the month’s end. The sales team forecasts expected sales to reach $15,000, and there’s a plan to introduce discounts totaling $1,200 during the sales period.

Now, plug it into the formula:

Open-to-Buy = ($90,000 + $15,000 + $1,200) − $80,000 = $26,200

So, the retailer’s Open-to-Buy is $26,200. If the initial markup (IMU) stands at 25%, then the Open-to-Buy at cost would be $6,550.

Remember, these numbers are a guide. Before committing to your OTB plan, make sure it aligns with your business reality. If your actual ending inventory is within a 5% range of your plan, you’re steering your inventory management ship in the right direction.

Benefits of open-to-buy planning

• • Optimal inventory levels: Open-to-buy planning maintains the right stock levels, preventing excess inventory or stockouts. This ensures healthy cash flow and customer satisfaction by avoiding issues like excess stock and aging inventory.
  • Better financial control and customer satisfaction: Integrated open-to-buy planning aligns financial goals with inventory purchase plans, minimizing over-buying, stockouts, and missed sales. This enhances financial control and customer satisfaction through effective assortment planning.
  • Flexible, reactive planning structure: Open-to-buy planning’s flexible structure, whether weekly or monthly, allows swift adjustments as conditions change. This agility enables budget updates without being constrained by annual or quarterly plans.
  • Avoid overspending: Open-to-Buy planning divides spending into manageable periods, preventing overspending, aligning purchases with the budget, and ensuring financial discipline. This approach maintains positive cash flow, allowing budget flexibility for vital areas such as marketing and overhead costs.

• Detect patterns and trends: Open-to-buy planning also enables you to detect seasonal trends and patterns by analyzing past sales data. This valuable insight aids in making informed decisions and adjustments for your business.

Limitations of open-to-buy planning

Open-to-buy planning, despite its merits, has certain limitations:

• Limited error room: While providing a precise number for budgeting decisions, open-to-buy allows little room for error. It’s advisable to subtract a few dollars from your prediction to accommodate unexpected situations. The rigidity of the plan may pose challenges when dealing with unforeseen circumstances.
• Dependency on additional data: While providing a foundation, open-to-buy doesn’t offer a complete view of your business or inventory. To create truly data-driven budgets, incorporate other metrics such as sales forecasts, inventory turnover rates, margins, and markups.
• Ineffectiveness for staple products: For permanent staples in your store, open-to-buy planning may not be the most suitable method for setting buying budgets. Its inflexibility might not accommodate situations where waiting for shipping or volume discounts is more beneficial.
• Ideal for companies with extensive SKUs: Open-to-buy planning might prove to be more labor-intensive than beneficial for companies with a limited number of Stock Keeping Units (SKUs). In situations with a smaller product range, buying predictions can often be derived by simply reviewing past inventory and sales data.

How to create an open-to-buy template for your retail business 

Here’s a step-by-step guide to creating a retail open-to-buy plan with a simple template, ready to use:

1. Know your business goals

Define your financial and sales goals for the upcoming period. This includes revenue targets, desired profit margins, and any specific objectives you want to achieve.

2. Collect historical data

Analyze past sales data, inventory turnover rates, and other relevant metrics. Identify patterns, seasonal trends, and any factors that influenced your inventory performance. This forms the foundation for your planning.

3. Determine key metrics

Based on historical data and your business goals, create realistic sales forecasts for the upcoming period. Break down the forecasts by product categories or SKUs if applicable.

4. Calculate beginning inventory

Assess your current inventory levels at the beginning of the planning period. Calculate the total value of the stock on hand.

5. Set sales forecasts

Based on historical data and your business goals, create realistic sales forecasts for the upcoming period. Break down the forecasts by product categories or SKUs if applicable.

6. Plan for markdowns

Consider any planned markdowns or promotions during the sales period. Factor in discounts, clearance sales, or other strategies that might affect your profit margins.

7. Set end-of-month inventory targets

Define your desired end-of-month inventory levels for each product category or SKU. This should align with your sales forecasts and overall business goals.

8. Calculate Open-to-Buy

Use the formula: 

OTB = Planned Sales + Planned Markdowns + Planned End-of-Month Inventory − Beginning-of-Month Inventory

9. Apply a safety margin

Deduct a safety margin or contingency factor (e.g., 5%) to account for uncertainties or unexpected changes in the market. This makes your plan flexible and adaptable to unforeseen circumstances.

10. Monitor and adjust

Regularly monitor your actual sales, inventory levels, and other relevant metrics throughout the planning period. Compare them against your Open-to-Buy plan and make adjustments as needed to stay on track.

Open-to-buy template

To use the template, simply input accurate and up-to-date numbers. Also, regularly update the plan with actual sales and inventory data to improve accuracy.

Open-to-buy planning with Inventory Planner

Inventory Planner excels in open-to-buy planning, providing standard OTB functionality crucial for cash flow protection. Unlike basic tools, it simplifies the process, offering expert support and seamless integration for accurate forecasting, no matter the size or complexity of your business. 

With flexibility tailored to business preferences, Inventory Planner allows planning in retail/revenue, cost, or units. Plan by category, brand, or vendor, considering purchase orders, transfers, and assembly orders for precise location-specific planning. The software’s tag-based planning and adaptable timeframes add further customization, making OTB straightforward and effective.