Open-to-Buy

What is Open-to-Buy?

Open-to-Buy (OTB) is a fundamental concept in retail category management that plays a crucial role in ensuring the success and profitability of a business. It is a technique used to identify the merchandise that has been budgeted for purchase during a specific time period but has not yet been ordered. In simpler terms, OTB is the process of planning merchandise sales and purchases.

To understand the concept of OTB, it is important to recognize that retail businesses need to carefully manage their inventory to meet customer demand while minimizing excess stock. OTB helps achieve this balance by providing a framework for determining how much merchandise should be purchased within a given timeframe.

OTB budgets are typically set by commodity group rather than by individual suppliers. This approach allows retailers to focus on the overall needs of their business and make informed decisions about which products to invest in. By considering the broader category rather than specific suppliers, retailers can ensure a diverse and well-rounded assortment of merchandise.

The formula for calculating OTB is as follows: OTB = Planned Sales + Planned Markdowns + Planned Inventory - Actual Inventory - On Order - Actual Sales. This equation takes into account various factors that impact the availability and profitability of merchandise. Planned sales and markdowns represent the expected revenue and discounts, while planned inventory refers to the desired stock levels. Actual inventory reflects the current quantity of merchandise on hand, while on order represents the items that have been ordered but not yet received. Finally, actual sales indicate the quantity of merchandise sold during the specified time period.

By regularly monitoring and adjusting the OTB budget, retailers can effectively manage their inventory levels and make informed purchasing decisions. This process helps prevent overstocking or understocking, which can lead to lost sales or excessive carrying costs. Additionally, OTB enables retailers to respond to changing market trends and customer preferences, ensuring that their merchandise assortment remains relevant and appealing.

It is worth noting that OTB is closely related to another concept called Open-to-Receive (OTR). While OTB focuses on planning merchandise purchases, OTR refers to the process of tracking and receiving the ordered merchandise. Both concepts are interconnected and essential for maintaining an efficient supply chain and optimizing inventory management.

In conclusion, Open-to-Buy is a vital technique in retail category management that allows businesses to plan their merchandise purchases effectively. By considering factors such as planned sales, markdowns, inventory levels, and actual sales, retailers can make informed decisions about their purchasing budgets. This approach helps maintain a balanced inventory, meet customer demand, and maximize profitability.