Open to buy (OTB) is a merchandise planning system where a retailer operates with purchasing budget. In ForecastingApp, we use a specific implementation of the OTB system.
In the OTB you operate with four basic assumptions: demand forecast, the forward cover, VAT (sales) tax rate, and current stock level.
The forward cover indicates the number of weeks the stock should last at any given time, given the future demand. You need to have forward cover in the system before having a meaningful purchase budget. It is said, the rule of thumb of forwarding cover for a category should be the lead time in weeks plus 50% of the lead time plus two weeks. Of course, there are more factors, such as depth of assortment.
In the following figure, you start the plan with no opening stock. You will need to populate the balance via intake, for which you can set the desired margin percentage and the amount in retail value. You also need to set the forward cover weeks. A crucial step is to have a sensible sales forecast.
Once all these are in place, your open to buy is at the bottom rows of the form. Green underbought indicates that you need more of this merchandise, whereas the red overbought figure tells you that you are overstocked and should consider clearance sales.
Typically, the forward cover is longer than four weeks as in this example; thus, you should estimate your sales for at least as many weeks in the future ad your cover weeks number.
To optimise the margin, you need to find a compromise between discounts, individual order sizes, and other factors.
ForecastingApp allows you to create sales forecasts in the blink of an eye so you can have more time to consider your purchasing strategies.
Another consideration is that the categories you operate with are uniform in terms of item pricing within, and customers can easily find a substitute for what they are looking for. This also means that a single category should not include both budget and high-end products of the same type. Otherwise, you may have misleading information that you are sufficiently stocked, but in reality, the buyer's can't find products at their desired price levels.
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