What's an Open-to-Buy Tool and Why is it Important?

What's an Open-to-Buy Tool and Why is it Important?

You may have heard about open-to-buy (often referred to as OTB), but what exactly is an open-to-buy-tool, and how do you know if you need one? Let’s get into it.

Open-to-Buy is essentially looking at your inventory planning like a checkbook in order to maintain an ideal amount of inventory on hand. When your product is sold, it decreases the amount of inventory you’re holding. You can increase your inventory levels by ordering more product (also known as receipts). 

Because sales typically don’t happen exactly as planned, there may be times when your inventory starts to pile up, or you see such high sales that you begin to run out of inventory. The best way to prevent either of these situations is to utilize an open-to-buy inventory planning tool.

The goal of any business that holds inventory is to always have enough product to fulfill the sales demand, without having excess or unproductive inventory sitting around. Using an open-to-buy tool will keep you proactive with your inventory planning. You’ll monitor sales and receipts (or inventory orders) each month and be able to project your future inventory position in order to make better inventory decisions each month.

What Metrics Does an Open-to-Buy Tool Use?

While every company is different and may include supplemental metrics in their open-to-buy tools, we’re going to talk about the basic metrics that are always included.

Plan Sales - the total sales you are expecting to achieve each month. We typically recommend that you track this as sales at cost (or COGS - cost of goods sold). This is often the most accurate way to track your open-to-buy, as the retail value of sales can change based on discounts.

Plan Receipts - the total receipts you originally plan to bring in each month, based on your original sales plan. This should also be tracked at cost for accuracy.

Plan BOH - This acronym stands for your plan Beginning On Hand, which is basically the total amount of inventory you plan to own at the beginning of each month. You’ll be managing your open-to-buy to stay as close to these monthly beginning on hand numbers as possible. 

Once you have your plan numbers set, you will build your open-to-buy tool and begin to track what is actually happening in your business month-to-month. For this, you’ll need to bring in sales and receipt actuals.

Sales - The sales (at cost, or COGS) that have actually happened already.

Receipts - The receipts (at cost) that actually happened.

BOH - Your actual beginning on hand inventory (at cost).

We can now look at our future monthly inventory forecast because this tool calculates your future BOH for each month by taking each month’s BOH, minus sales, plus receipts, to carry forward the next month’s BOH. 

As we do this, we’ll often want to make changes based on what’s going on in the business. Maybe sales are 10% higher than we expected, and we need to add more receipts and adjust our future sales expectations. This is where we can bring in a set of forecast metrics to reflect a more accurate picture of how sales and receipts will actualize.

Forecast Sales - The revised sales (at cost) forecast based on updated sales trend information. This can change every month as you react to actual sales data to better predict future sales.
Forecast Receipts - The revised receipts (at cost) forecast based on any actions you’re able to take.

Open to Buy - This metric refers to how heavy or light you are to your original BOH plan for each month. When inventory is heavy (meaning you have more than planned) this will be shown as a negative number with parentheses around it. If inventory is light, or under your expectation, it will be a positive number. 

The Open-to-Buy metric is the one you’ll be looking to for guidance on what action to take, and can be thought of as your inventory spending checkbook. If you’re light, you’ll likely want to increase or move up receipts to come in earlier and get close to zero open-to-buy. If you’re heavy, you’ll be looking to cancel inventory orders or shift receipts out to come in later in the year.

How Should an Open-to-Buy Tool Be Used?

Once you’ve updated your open-to-buy tool with all the metrics you need to analyze, you’ll be able to use this forward looking snapshot to make better business decisions as a team. We recommend reviewing this tool at the beginning of each month to understand how your inventory picture has changed, and if there are any receipt changes that need to be made. 

If changes need to happen, your team can discuss if there are certain categories that are more affected than others. In fact, many companies will have separate open-to-buy tools for each category in order to focus on where specific action is needed. Your weekly sales recaps will also be a great reference point when digging into what specific product you need to be taking inventory action on.

Get More From Your Open To Buy Tool with Boon

Now that you know all about open-to-buy tools and how to use them, you may be ready to begin using one for your business. Check out our Sales and Inventory Planning Toolkit for an easy-to-use downloadable open-to-buy tool you can get started with today. 

Need more support? Book an intro call with us to learn how Boon can set up your inventory planning tools and processes, and begin running them for you as an extension of your team.