In the previous article we looked at the mechanics of a retail open to buy system. In this article I will look in more depth at some of the constituent parts of the system. As you will remember the Open to Buy model that we looked at was like this :
|Period’s Forward Cover||3||3||3||3||3||3|
|Closing Stock Required||500||450||350||300||300||300|
Let us now look in greater detail at the variables that we use in the calculations.
1. Forecast Sales
The first thing that we do in planning Open to Buy is to create a sales plan by period. This sales plan will drive the other calculations, so it is important that attention is paid to the accuracy of the periodic phasing.
2. Periods’ Forward Cover & Closing Stock Required
The entry in periods cover is the second driver of the system. Cover means the amount of stock that we need, and it is normally related to forecast sales for a given number of periods, hence the term periods cover. Period’s Cover can be expressed in two ways. Most simply it is expressed as flat cover. Thus if 3 periods cover is required and the forecast for the current month is 100 then the stock requirement will be 3 x This Periods’ Sales Forecast (100) or 300. At a more sophisticated level we use “forward cover” . This means that rather than multiplying the current period by 3, the system would add up the next three periods’ sales. With seasonal merchandise this can make a large difference. Consider the effect of the two different methods where the sales forecast is 100, 200, 300 for the next 3 periods. Flat cover in the first period would produce a stock requirement of 300, whilst forward cover would produce a requirement of 600. Many spreadsheet users limit themselves to flat cover as the calculation is easier to program. It is, however, possible to create spreadsheet formulae to calculate forward cover.
3. Opening Stock
The value of opening stock is a flow calculation. In Open to Buy planning the first entry will be an estimate, resulting either from user input or from the last forecast from the previous season. From the second period onwards, the figure is the closing stock from the previous period.
The intake requirement is calculated by subtracting the opening stock from the closing stock required and then adding in sales. If working with a value based model, then you may also add markdown back in as well. You should note, though, that there is a case to be made for not buying back markdown.
5. On Order
The on order quantity is normally fed from summaries provided by the central merchandising system, and shows the items due for delivery in the relevant period.
6. Open to Receive
The open to receive is calculated by subtracting the on order quantity from the intake requirement. It is important to realise that we are looking at the intake of goods here and not the placing of an order. The goods in any given open to receive may be ordered in any number of preceding periods, depending on lead times.
7. Closing Stock
Is normally calculated by taking the opening stock, subtracting sales, and adding the on order and open to receive quantities, although some systems omit the open to receive and thus generate a cumulative open to buy. Closing stock will normally be the same as the Closing Stock Required, although this may not always be the case. If for example the closing stock required is not attainable due to insufficient sales, then the system should calculate the lowest closing stock achievable and show the difference as an overstock. In the final article of this series I will look at the advantages and disadvantages of using forward cover, and take a look at the arguments for planning an Open to Buy in units or value.