The goal of good inventory management is to maintain an appropriate level of inventory for the amount of sales that you are generating. You want to have adequate assortments when sales are slow so that you don’t miss possible sales, but not so much that you drain your cash flow. When sales pick up, you want to increase your inventory levels to support the increased sales, but be careful not to over buy. In other words...
The Right Amount
Of the Right Stuff
At the Right Time
This is where Open To Buy planning comes into play. It tells you how much inventory should be on hand at the beginning of any given month and how much new merchandise should be received during the month to maintain your optimum inventory levels.
There are four basic steps to creating a simple, effective open to buy system. They can be done on a computer using sophisticated programs or more simply using pencil, paper and a calculator. The first three steps are usually done once a year and, when completed, give you a complete open to buy plan for the upcoming year. The final step is to use the open to buy plan you have created to adjust your monthly merchandise flow.
Step 1. Plan your annual sales and markdowns. This is probably the most important step in the process since the stock levels are derived from the planned sales
Step 2. Plan your average stock, turn, and Beginning Of Month stocks. This step is the more difficult step. You need to determine what stock levels and turnover rates are appropriate for your business.
Turns that are too slow will give you stock levels that are too high - you’ll face high markdowns and low cash flow. If your turns are too fast, the planned stock levels will be too low - you’ll miss sales and give poor customer service due to out of stocks.
Step 3. Calculate an Open To Buy plan for every month. Once you have planned sales and stocks, you can calculate how much merchandise to receive (how much you have “open to buy”) each month.
Start with the beginning of month stock plan (stocks at retail dollars) and subtract sales (sales decrease stock levels), and subtract markdown dollars (the amount you take in markdowns also decreases stock levels). Compare the result to your planned end of month stock levels.
The difference is how much merchandise you should receive during that month.
Step 4. Adjust monthly using OTB projections. The last step is to use the plan you create to monitor your sales, stock levels, and purchases.
For example, if your sales slow down your stock levels are likely to increase. In order to stay on plan, you’ll have to buy less the next month, or take additional markdowns, or cancel orders, or a combination of these. If sales are increasing, you’ll need to buy more in order to stay on stock plan.
Adjusting monthly lets you keep your stock levels at the optimum levels for your business.
By Bob and Susan Negen, WhizBang! Training, 233 Washington Ave. #213, Grand Haven, MI 49417, Phone: 616-842-4237, Toll Free: 800-842-1660, Fax: 616-842-2977, Email: info@whizbangtraining.com
