Better Manage Inventory with Open-to-Buy Planning
By Bob Phibbs
At some point in a business’s life, you will have an excess of product due to lower demand. Unfortunately, holding on to merchandise can kill profit margins. That’s why it is important to adopt an open-to-buy system when running a retail store.
Open-to-buy is an inventory management strategy that helps retailers understand how many products they need to buy. Using this method, stock levels should correspond with most recent sales trends. For example, you can order 10 per cent more merchandise if sales grew by that amount in the previous two months.
How to Make an Open-to-Buy Plan
To figure out your open-to-buy plan, take a physical inventory of all your merchandise at full value. Be sure to count any returns, holds and so on. Next, run a year-end report. Divide it by 12 to arrive at how much you sell per month on average. Then, divide your average monthly total sales by your on-hand inventory. Some months will be higher than others so perform a complete store inventory at least twice a year to be accurate.
Let’s say your physical inventory is $500,000 at retail. Last year’s total sales were $1.5 million. Divided by 12, average monthly sales was $125,000. When you divide total inventory ($500,000) by average monthly sales ($125,000) you get the number four. This means you have approximately four months’ worth of on-hand inventory. That’s bad. Generally, you want a merchandise turn of at least two. In this example, you should have no more than $250,000 at retail on your sales floor at any one time.
When you have too much unsold merchandise, it means you have zero open funds to buy new products or an open-to-buy of zero. In that case, and any time you are overbought, you should look for alternative ways to increase merchandise turnover.
Don’t Hold on to Past Failures
If a product didn’t sell when it was new, don’t think it suddenly will six months later. It’s best to identify as quickly as possible what is not performing, move it out and bring in fresh merchandise. That allows you to get more of the right products to grow profits.
Use your category sales report from your point-of-sale system to determine correct inventory levels. Otherwise, you might think a product being out of stock is reason to reorder when missing stock could be due to demand or theft.
All of your categories should be able to be profitable. Shopworn merchandise is like sour milk — people avoid it.
Take aggressive markdowns now while you have shoppers coming in rather than waiting to have a clearance sale when few are entering your doors.
Bob Phibbs is CEO of The Retail Doctor. He is a leading expert on brick-and-mortar retailers, internationally recognized business strategist, customer service expert, sales coach, marketing mentor, author of three books and motivational business speaker.