What is an Open to Buy (1)

In the late 1980’s and early 1990’s, when retailers began to take notice of the relatively new discipline of Merchandise Planning, the most common application developed was a Stock and Sales Intake plan. These plans were (and still are) frequently developed on spreadsheets and served to ensure that an appropriate relationship was planned between projected sales and required stock levels. They are normally operated at a summary level (for example “Category”) although the increases in computing power mean that it is technically possible to operate them at a line or even SKU level.

The key output from such systems was a figure called the Open to Buy for each planned figure. In fact, given the extended lead times between order and receipt in fashion merchandise, this might more properly have been called an Open to Receive, as it really shows the amount of merchandise still required for intake in the given period. However, the term Open to Buy is the common usage so we shall continue to use it here.

An Open to Buy control system uses planned sales forecasts and stock turn requirements to determine the optimum level of stock required.

The stock turn requirement is normally expressed in terms of Weeks Forward Sales Cover. Weeks Forward Sales Cover means the number of weeks’ future sales that we need to keep in stock. There is a direct link between Weeks Cover and Annual Stock-turn. For example 26 weeks cover is equal to an Annual Stock-turn of 2 in a 52 week year. As some systems are based on periodic or monthly data you may also see the terms Periods Cover or Months Cover used.

The use of this method of calculating a stock requirement ensures that volatility in the pattern of forward sales is reflected in the periodic stock holding. This in turn ensures that working capital is targeted most effectively by maximising sales potential at the same time as minimising losses from price reductions.

In a properly integrated system this Open to Buy value will in turn be used to create a purchase order budget total in the central transactional system. This integration will ensure that the results of the planning exercise are translated effectively into tactical action.

Open to Buy systems normally operate using a flow calculation. This is also known as a “ladder plan”.

This is shown in the following simple, unit-based, example where the Closing Stock for the first period is a result of adding the Opening Stock, On Order and Open to Buy, and then subtracting the Forecast Sales. This closing stock then becomes the opening stock for period two and so on.

P1 P2 P3 P4 P5 P6
Opening Stock 200 500 450 350 300 300
Forecast Sales 100 150 200 150 100 100
Period’s Forward Cover 3 3 3 3 3 3
Closing Stock Required 500 450 350 300 300 300
Intake Required 400 100 100 100 100 100
On Order 200 100 0 0 0 0
OTB Remaining 200 0 100 100 100 100
Closing Stock 500 450 350 300 300 300

Each period is therefore dependent on the previous periods’ stock levels in the determination of its own Open to Buy which is calculated as the difference between the intake required (closing stock required minus the opening stock less sales) and the on order figure. In column one in the above example the calculation of the Open to Buy is 500 – (200 -100) – 200 = 200.

In my next article I shall explore in more depth the constituent parts of the Open to Buy system and some of the key issues that must be addressed in setting up an effective OTB control.

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