Open To Buy
Open to buy (OTB) is a merchandise planning system where a retailer operates with purchasing budget. In ForecastingApp we use a specific implementation of the OTB system.
In the OTB you operate with four basic assumptions: demand forecast, the forward cover, VAT (sales) tax rate, and current stock level.
Forward cover indicates the number of weeks the stock at any given time should last given the demand of the future. You need to have forward cover in the system before you can have a meaningful purchase budget. It is said, the rule of thumb of forward cover for a category should be lead time in weeks plus 50% of the lead time plus two weeks. Of course, there are more factors such as depth of assortment.
In the following figure you start the plan with no opening stock. You will need to populate the balance via intake for which you can set the desired margin percentage and the amount in retail value. You also need to set the forward cover weeks. Crucial step is to have sensible sales forecast.
Once all these are in place your open to buy is at the bottom rows of the form. Green underbought indicates that you need more of this merchandise whereas red overbought figure tells you that you are overstocked and should consider clearance sales.
Typically, forward cover is longer than four weeks as in this example thus you should estimate your sales for at least as many weeks in the future ad your cover weeks number.
You need to find a compromise between discounts, individual order sizes and other factors to optimize the margin.
ForecastingApp allows you create sales forecasts in the blink of an eye so you can have more time to consider your purchasing strategies.
Another consideration is that the categories you operate with are uniform in terms of item pricing within and customer can easily find a substitute for what they are looking for. This also means that single category should not include both budget and high-end products of the same type. Otherwise you may have misleading information that you are sufficiently stocked but in reality the buyer's can't find products at their desired price levels.