Stock Planning: Untapped Profits

Open To Buy (OTB) is a way to forecast inventory and place advance orders. Retailers need to use Open To Buy in order to manage their inventory. Open-to-buy planning is now possible thanks to cloud-based technology. This technology allows for high-speed, reliable and profitable open-to buy planning. It is not uncommon to see gross margin increases of three to eight percent. These are the reasons. The inventory levels are the basis of almost every retail performance indicator: return on investment (ROI), stock to sales ratio, stock-to-stock ratio, gross margins and cost of goods sold.

Optimizing inventory levels is a key factor in retailing success. Independent retailers prefer to plan their business using a variety methods, including spreadsheets, sharp pencils and gut feelings. These manual methods can be more expensive than professional software services.

This table shows the Gross Margin percent of a shop who switched from an open-buy spreadsheet that calculated eight major departments to a software program that quickly calculated all 32 classes. The columns to the left were created when spreadsheets were still used.

The shop started using OTB software in 1999. At the end of the year, the figures were crunched and the gross margins had increased by five percent. This is $25,000 to the bottom line in a shop worth $500,000 This was not an isolated event. The spreadsheet baseline was 8 percent higher than the six-year average, and there were incremental improvements over the following six years. This is $40,000 of untapped margins. They have reached a new level of performance not only in gross margins but in all retail performance measures.

The shop had enough inventory, but not too much. They were close to the optimum in each classification for each month and every year. Any sales trends that began to emerge at the end each month, when raw data from POS was entered into OTB software, the entire OTB forecast could be regenerated with just one click. This was for every class in every month.

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Why software is more profitable than spreadsheets?

In retrospect, the answer is very simple. Software has no limitations on the number of classifications that can be used to calculate OTB solutions. So they calculated all 32 sub-classifications. It was a huge difference. It was the only explanation because there were no other changes over that 10-year period. The same buyer, the same management, the same floor space and there were no fluctuations in weather or economy. Only the method for calculating OTB changed.

Now we know that there was a difference between having an OTB only for major departments and one for each classification. It was $25,000 to $40,000. The spreadsheets cost us $25,000 to $40,000. In this example, the Average Inventory fell from $101,000 to $86,000. This is $15,000 in the bank and not the storeroom.

You need to have optimal inventory in all departments. Fill-in-the blank OTB software is the only way to achieve this. It’s practical and cost-effective. You do the math, not them. This technology is the most recent in “do it yourself” and replaces spreadsheets and calculators that have become obsolete and too expensive.

The right software

Google the phrase “Open To Buy Software” and you will find the top three to four results. Make an informed decision by examining the products. This decision is based on a high risk/reward ratio. Balanced against the provider’s fees of $25,000 to $40,000/year, which are small in comparison. While not all shops will be able to produce additional $25,000-40,000, some will. Some shops will produce less while larger shops will produce more. You can be sure of one thing: If you are calculating partial OTB classifications and upgrade to a system capable of calculating every OTB classification, any retail performance plateau that you’ve reached will fall to an entirely new level.

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