Purchasing Managementby Udit Jain on June 13, 2007
Purchasing management is a key component of smarter financial management for any retailer, regardless of size. One of the most effective means of controlling purchases is to implement and enforce the use of an Open-To-Buy process. As stated above, OTB is a tool designed to direct and control spending by the buying and merchandising divisions. A simplified OTB for 6 periods (6 months or 6 x 4-week periods) is represented on the next page:
Open-To-Buy = Closing stock – opening stock – on order + sales.
When the Open-To-Buy figure is negative, as in periods 1 and 3 above, retailers are said to be overbought and have too much stock. A true Open-To-Buy will account for many other factors such as markdowns and other financial adjustments that might impact margins or inventory levels. Some retailers also show unapproved On Order as a barometer for what else might happen.
P1 P2 P3 P4 P5 P6
Inventory 865 1205 1476 1812 1982 1512
On order 950 600 1230 57 20 17
Sales 486 501 704 792 1020 962
Inventory 1205 1476 1812 1982 1512 1015
Open to Buy (124) 172 (190) 392 350 295
As each month passes the planned numbers from the merchandise plans are updated with either revised forecasts or actual numbers. As a forecasting tool the OTB can be revised weekly to reflect updated plans based on trend and any anticipated changes in future
A key aspect of using an OTB is the agreement of the revised forecast between the merchant and their senior merchant (or owner perhaps in a small company). Once they agree what the future might look like, they can then discuss an action plan to impact on-orders, markdowns or even the promotional calendar to reflect their new view of what is to come. By design, the OTB
is not a sophisticated forecasting tool, but should rely on outside applications and information to help the merchant revise forecasts.
The senior merchant’s role is one of summary, control and oversight. The senior merchant should also have an OTB reflecting their area of responsibility. An aggregation of the lower level OTB should be compared and managed to an OTB they maintain.They must monitor merchant compliance to agreed actions, approve or deny additional purchase orders, and hold monthly meetings to review.