What is an Open to Buy (3)

In the last two articles we looked at how Open to Buy systems operate and some of the calculations that are commonly found in them. In this article I am going to investigate a couple of more theoretical areas. Firstly why we should use forward cover and secondly what is the impact on cover calculations of planning in units, gross or net values.

Should we use flat or forward cover ?

In an uncomplicated world we would simply order merchandise to come into the business exactly when the previous stock is sold out. However life isn’t really that simple, especially if we are forecasting at a summary level. Allowing stock levels to fall too far results in range fragmentation at the SKU level and resulting lost sales. To combat this we have to factor in required minimum stock levels, re-order cycles and supplier and replenishment lead times.

A common way of incorporating these factors is to drive the open to buy by using forward weeks cover.

Suppose that you have a weekly re-order cycle, the supplier lead time for the products in question is 5 weeks, the replenishment lead time is 1 week , and you require a minimum of 4 weeks worth of stock to maintain an unfragmented range, then you would operate on a forward cover of 10 weeks (1 + 5 + 1 + 4).

You would maintain this cover until either one of the variables changed (perhaps replenishment lead times might extend in peak periods), or until such a time as you need to sell out of the product, at which time the cover would be reduced.

When using forward cover you must always be aware of the logistical implications. As an example, think of the Christmas period where there is frequently a combination of increased demand and finite capacity for processing and storing stock in the warehouse. In this case it may be necessary to increase or decrease ideal cover requirements to allow for these constraints.

You also have to provide forward sales forecasts for more periods that are needed to meet financial budgetary requirements. If you want to use 20 weeks forward cover in the calculation of the last week of a planed season, then you need to forecast 20 more weeks’ sales. Some systems get around this by using a wrap function that “borrows” the sales from the equivalent periods last year, so that the pattern if not the absolute values are “right”.

Units, Net or Gross?

Another issue that is often raised with forward cover is that it appears to vary according to whether you plan units, gross sales (before markdown) or net sales (after markdown).

Unit sales and gross sales provide consistent views of stock requirements and weeks cover at summary levels. However, applying the cover formula to the net sales figure on its own provides a second, apparently contradictory figure.

The solution to this problem lies in adding back in the forward markdown to the forward sales. This places all three back into kilter again. I have yet to see a clients spreadsheet based system that takes this into account.

Does yours?

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