Open-To-Buy Planning Impacts Profits

Published in Golf Business Magazine, Dec 2002 (Author Tim Ogle)

Although organizations may use different systems and terms, merchandise may be classified into two major groups or departments. Each of these may contain several merchandise classifications, or categories, and several sub-classifications.

You may ask, why is this important, and how many classifications should be calculated for open-to-buy purposes? If 25-35 classifications were calculated, open-to-buy plans would obviously be more accurate than planning only eight to ten classifications. However, for practical reasons, many buyers have limited their planning to major classifications and simply estimated the the remaining, or sub-classifications. This compromise impacts the bottom line.

Inventory planning affects profits. For example, if only major classifications are calculated, purchases must be estimated for the remaining uncalculated sub-classifications. If estimates are low, sales can be lost. If high, excess inventory investment is required, cash is tied up, and season-ending markdowns decrease average profit margins.

As important as it may be to calculate ALL merchandise classifications, the number which are calculated is only part of the equation. Open-to-buy planning should be adjusted every month. Without monthly updating, buyers must subjectively react to actual sales by making mental adjustments for moth major and sub-classifications as the year progresses. If buyers do not adjust purchases to actual sales levels, high budget errors will accrue, causing compounded over-stocking by the end of the budget year. Low estimates can cause under-buying, low shelf stocks and unplanned replacement orders.

There are two types of open-to-buy systems: forecasting and replacing. Replacement orders are a reaction to past sales. Forecasting is the anticipation of future sales. Accurate and updated forecasting eliminates the need for replacement orders.

Monthly updating keeps forecasts accurate. Open-to-buy plans, which are adjusted monthly, help ensure that inventory forecasts are corrected back to budget plan every month, for all future months, virtually eliminating over or under stocking. A side benefit is that optimum inventory levels in every classification will turn faster, creating a fresher look in the shop, more customer interest and higher sales.

Just as it is difficult for managers to construct perfect budgets, it is even more difficult for buyers to sub-divide those budgets into multiple classifications, then forecast sales, purchases and inventory levels for more than a year in advance for every classification. Yet, this is what most buyers have been charged with doing.

To compound the challenge, few buyers have been provided with corporate tools to perform the task. Most managers and buyers have come to accept partial classification planning with no monthly updates as the best available solution. The absence of objective procedures for inventory planning has virtually exempted the process from management review. Far greater accuracy in open-to-buy planning can be achieved by a combination of calculating an open-to-buy for all 25 to 35 merchandise classifications and updating the open-to-buy calculations every month.

       Tim Ogle, president Open To Buy Wizard, LLC     www.opentobuywizard.com 

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