Sounds good, right? But how can OTB do that? Well, it’s easier that you might expect. But you cannot keep doing what you’ve been doing and expect a change. What did Einstein say… “Insanity is doing the same thing over and over and expecting a different result”.
You will need to change how you plan and control your buying. Markdowns are the result of buying the wrong quantities. Even if you’re buying great items, too much of a good thing is a bad thing. Your store can only generate a certain amount of sales and inventory is not the driving force.
Retailers feel they can grow their sales with more inventory. That’s just plain wrong. While you need the right amount of merchandise to support your anticipated sales, the excess becomes markdowns. Markdowns are the path to retail failure since they eliminate any contribution to overhead and profits. Without the contribution to overhead, you cannot pay the rent, your help, utilities, advertising, etc.
You need enough inventory to support your sales, but how do you determine that amount of inventory? The additional factor in the mix is turnover. Sales are great, but turnover is how retailers make money. Simply put, the more you turn, the more you make. In addition, the combination of sales and turnover will determine how much inventory you need each month to support your sales and bring you the turnover you desire.
Turnover is the rate at which you deplete your inventory on an annual basis. If you turn your inventory twice a year, it means that (dividing turn into 12 months) you would need six months of sales in stock at any given time to support your projected sales at a two time turn rate. If your desired turnover is four times a year, it would mean that you would be carrying three months of sales in stock at any given time to support your projected sales at a four time turn rate.
Now, I’m sure that last paragraph had your eyes beginning to cross, and rightly so, but don’t despair. There is a process based on sales and turnover that will yield your monthly buying plan in each merchandise category for the next 12 months. It’s an open to buy plan. Since your main interest in retailing is merchandising, your store environment, displays, selling, etc. you should get an open to buy system in place to give you the buying plan you need. After you do get your OTB system set up and start buying the right quantities, you’ll see that your need to take markdowns is greatly reduced.
So, if cutting your markdowns is your goal, and it certainly should be, an open to buy system is the way to make that happen.