Open to Buy / Buy Plan

There seems to be confusion at some facilities between an open-to-buy report and a buy plan. While they are both valuable retail tools they are not one and the same. A good definition of the difference is an article by Ted Hurlbut. Ted Hurlbut is the Principal of Hurlbut & Associates, a retail consulting and business advisory firm based in Foxboro, Massachusetts. He is focused on helping his clients increase sales, margins, profitability, and cash flow, and is particularly attuned to the challenges facing smaller, independent, entrepreneurial retailers. You can learn more about Ted, and Hurlbut & Associates, at http://www.hurlbutassociates.com

So what exactly is an Open-To-Buy?

The clearest and simplest definition is that it is a financial budget for retail merchandise. Let's look at this more closely.

An Open-To-Buy relates directly to retail merchandise, is structured specifically to address the needs of retailers, and is a tool designed to assist retailers manage and replenish their most significant asset, their inventory investment.

An Open-To-Buy is a budget, and involves the full range of budgetary functions. It begins with the planning process, is future oriented, provides guidance on how much to buy, and provides benchmarks for evaluating progress, and adjusting future plans.

An Open-To-Buy is a financial tool, in that the units of measure are typically dollars, usually retail dollars but sometimes cost dollars, and that it can be tied back to the financial control process.

An Open-To-Buy can work on any level that a retailer needs it to. It can be used to track merchandise at the company, department, classification or sub-classification level. In rare cases for a small retailer, it can even be used to track an individual item.

Fashion and Seasonal Merchandise versus Basic In-Stock Items

It is important to note from the start, that as a replenishment tool, an Open-To-Buy is not appropriate for all categories of merchandise. It is most appropriate for fashion merchandise where the specific items may change, but the departments, classifications and sub-classifications remain relatively stable, and seasonal merchandise where inventories are brought in at the beginning of the selling season, and need to be managed down to pre-determined ending level at the end of the selling season.

In the case of fashion or seasonal merchandise, an Open-To-Buy answers the question of how much to buy, but not necessarily the question of which specific items to buy. For that, a detailed assortment plan is necessary, which lays out exactly what items will be coming in when, and provides a plan for how all of the individual items come together to form a compelling merchandise assortment

In contrast, an Open-To Buy is not appropriate as a replenishment tool for day-in and day-out basics. These staple items are more effectively replenished using an automatic replenishment program running off of pre-determined minimum and maximum inventory parameters. In the case of these in-stock basics, an Open-To-Buy may still serve a valuable budget and control function at a department or category level.

Planning

Like any budget, an Open-To-Buy starts with a plan, then compares actual results to that plan and quantifies any variances. Carefully considered planning is the critical first step in constructing an Open-To-Buy.

The planning process begins with building a sales plan. For small retailers, most sales plans are broken out by the month, although in some cases, especially highly seasonal businesses or categories, it may be more appropriate to plan sales by the week. The question to ask is a very basic one: "What is the most likely level of sales from stock (excluding special orders) by month (or week)?"

Once a sales plan has been developed, the next piece of the planning process is to build an inventory plan. The question to ask is this: "How much inventory do I need at the end of each month to support the next month's sales (in some cases the ending inventory may need to support more than just one month of future sales), as well as maintain effective merchandise displays?"

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The sales plan numbers referred to are projections based on dollars and usually arrived at by analyzing last year’s sales and either adding or subtracting projected increases or decreases by percentage depending on all the obvious factors.

The inventory plan that this article mentions in the above paragraph is what I refer to as a buy plan, is measured in units not dollars and is as Ted Hurlbut points out the rest of the story. The merchandise buy plan guide explains how to base this unit plan on space, fixturing, categories and turns with the goal being “well-merchandised but not over-inventoried.”

The dollars and units approach is neither optional nor a debate between the two methods but in my mind, the only approach and the proper tools with which the small retailer can write appropriate orders per vendor and given their capacity. When a well developed Buy Plan is used in conjunction with an Open to Buy report and confirms that given existing inventory levels allow your planned buys in terms of dollars invested - a certain peace of mind develops that at least the planning part of the retail process is in sync.