Lights! Action! Razzle Dazzle! The trade shows have it all. The manufacturers will have done their homework and present an incredible array of exciting merchandise at the show. Settings will range from ultra-sophisticated to wildly outlandish. Looking around the show floor is planned to make you feel that next season is going to be a huge success.
But will it be a success? Or will it be another season when many retailers have to close their doors because invoices for incoming merchandise will take more cash than sales will supply.
While some retailers operate with productive open-to-buy systems, the majority are still “shooting from the hip”. Buying without any regimented planning is a sure route to financial disaster. Overbuying is epidemic among all retailers. There is no possibility that the right amount of merchandise will be purchased for each area of a store without proper planning. Consequently retailers find themselves out of balance – short in areas where merchandise is needed and heavy in areas where sales are weak.
Are you prepared to work the next show? Take the “Buyer’s Quiz” and see how ready you are.
- Do you have a specific retail dollar buying plan for each merchandise category for each delivery period for the next 12 months?
- Do you have a method for comparing and rating all available merchandise by category and delivery period before you actually place your orders?
- Do you maintain control of the buying process by writing orders on your own order forms?
- Do you keep running totals on all of your purchases relative to your buying plan so you will not overbuy?If you answered NO (honestly) to any of these questions you may be treating your store more as a hobby than as a business.
Some retailers have an attitude problem when it comes to dealing with numbers. They love dealing with their products, but they will do almost anything to avoid dealing with the numbers – until it is too late. Open-to-buy appears to be complicated and involved because there is no shortcut to determining correct buying numbers. It takes working through a specific numerical regimen to get to the proper end results. Once you have that process in place, open-to-buy is quite easy to deal with.
But what is “open-to-buy” and why is it so important? Simply put, open-to-buy is a forecasting tool with which a retailer can determine the amount of money to be spent on future delivery merchandise. By utilizing open-to-buy retailers are able to properly plan the monthly flow of merchandise into their stores so that their cash flow is always positive. Open-to-buy enables you to maintain a balanced inventory at the lowest possible level that will maximize sales and produce the highest return on the capital invested in merchandise inventory.
The open-to-buy process begins by dividing your merchandise into compatible categories and assigning codes for tracking. Then sales are projected for the next 12 months in each department, usually based on the preceding 12 months. If good history is not available, percentages can be used to go from total annual sales to annual department sales to monthly department sales.
Turnover is the key to making money in retailing and so determining proper turn rates will change the whole complexion of the buying plan. Turnover is a product of delivery times, shelf life, and the item quantity necessary to be properly presented. Additionally, annual turn rates should be adjusted to reflect the monthly fluctuations in sales.
Turn rates are then used to develop inventory factors, sometimes referred to as stock-to-sales ratios, so ideal beginning inventory levels can be calculated. Once beginning inventory levels are determined physical inventories can be compared with the ideal plan. At this point you should take some action to bring inventories into line.
With projected sales and your physical inventory and projected inventories for the next 12 months, the open-to-buy calculations can be performed. Starting with the beginning inventory and subtracting projected sales for Month 1 you will be left with an “inventory balance”. The difference between this inventory balance and the beginning inventory for Month 2 is the amount of merchandise needed to be received in Month 1. This is the open-to-buy amount for Month 1. By continuing these calculations 12 months into the future a retailer can establish a long range buying plan that is keyed to sales and turnover. During the month you will want to keep track of purchases, receipts and sales by category.
An analysis of actual sales, inventory, and turn rates is made at the end of each month. Your evaluation of the causes of the differences between actual and projected figures will point out on-going trends or unusual occurrences. With this information revisions can be made to the plan and new open-to-buy figures calculated. By comparing outstanding orders with these new open-to-buy figures, you can see where future orders are out of balance and alterations can be made before merchandise actually arrives in the store.
While a small amount of time must be dedicated to the maintenance of an open-to-buy system, the rewards far outweigh the time invested. The elimination of overbuying and the reduction of markdowns are just two of the major benefits of working with open-to-buy. The flow of merchandise will correspond to sales and with fresher merchandise sales inevitably increase. Balanced and reduced inventory and increased sales can only result in improved cash flow.
Retailers have the mistaken idea that their inventory is an asset. Actually, inventory is a liability. Merchandise is very much like coffee. The moment the brewing is finished the coffee is at its peak of flavor. As time goes on and coffee sits on the burner, the flavor becomes more bitter and the value of the coffee diminishes. Merchandise is at its peak of interest when it is taken fresh from the boxes, ticketed, and placed on the sales floor. Tomorrow it will be yesterday’s arrival, and a week or a month from now it will just be more merchandise.
If you work your open-to-buy before you work the next trade show, you will have greater control over the entire process. You will know your needs, shop till you find the best available merchandise, buy on your own order form, and buy to your dollar plan. When you return from market you will know that you did the absolutely best possible job for your store. Sure, you’ll be tired, but you can now sleep every night without worrying how the bills will get paid. What could be better?