Financial budgeting results in setting a sales target for the company. Retailers then build merchandise plans that start to break out how those sales will be achieved. Often, the sales goal built into the merchandise plan will be higher than the sales budget. This gives some room to under achieve the merchandise plan (usually the highest risk area for retail profitability) and still make the financial plan. (Note: Expenses are geared to the financial plan not the merchandise plan).
Smarter financial management involves coordinating merchandise plans with financial plans and the rolling Open-To-Buy (OTB) process. The problem for most companies is trying to keep the merchandise plan constant and unchanging, while the OTB is a dynamic,fluid tool.
Open-To-Buy is a mechanism designed to direct and control spending by the buying and merchandising operation. It ensures that enough merchandise is bought to support the merchandise plan and that overspending is reduced. The OTB is a tactical tool updated weekly, or monthly depending on the retailer. In most cases, OTB plans are produced at department or class level, though they can be produced at all levels of the merchandise hierarchy.
Fashion and other retailers of seasonal merchandise, such as toy retailers, use Open-To-Buy extensively. Grocers and other retailers with very stable inventories that don’t peak very much tend not to use Open-To-Buy techniques.
Open-To-Buy exists in two forms:
• The Open-To-Buy plan produced in advance of the season or year, as part of the merchandise planning process.
• An in-season or in-year control mechanism updated on a monthly or weekly basis.
(Fashion retailers tend to monitor OTB weekly, retailers selling less risky merchandise tend to do this monthly).
Retailers using the retail method of accounting will do most of the calculations at selling price. Retailers using cost accounting can convert sales at retail to sales at cost and then follow the same basic model.
The problem with reconciling the merchandise plan with the Open-To-Buy is the expectation that the plans should not change, but the OTB must re forecast its future numbers to ensure smooth operation. The relationship that links the two is not the actual dollar plans, but the percents contained in the merchandise plans. If a retailer is not meeting sales plans, they should look to reduce future purchases (where sensible) to maintain the inventory to sale ratio previously planned. One of the keys to successfully implementing an Open-To-Buy process is integration to other core merchandising processes and systems. Processes and systems such as purchase order management, merchandise and financial planning, warehouse management and inventory management should all be linked to the OTB process. This integration will eliminate many trouble spots and is offered by many software solution providers.