SNEWS® Retail Merchandising Training 101: Open-To-Buy

In our previous retail merchandising training article, we gave you an overview and some examples of how to set up a merchandise plan (click here to read). This is typically done well in advance of the selling season, especially with those categories of merchandise that are heavily dependent upon preseason order commitments to your vendors.

For a spring selling season (January through June), as you likely know, vendors usually need your order commitments by the prior September at the latest, and often your best access to product is even earlier. The bigger brands are out with their lines, looking for your reactions or even solid commitments, as early as June.

So you’ve got to be ready with your plan and be in a position to take advantage of these more aggressive discounts and dating programs offered as the quid pro quo for committing early.

This can be a challenge, since the comparable season you will be using as part of the basis for your planning may have barely concluded. But the extra points and cash flow benefit offered by longer dating make the effort well worth it.

As a preseason tool, your merchandise plan, particularly the receipts at cost line, is in fact your initial open-to-buy budget. You can rely on these dollar values to pre-book goods for delivery into the future season. We’ll discuss preseason buying strategies in a later article.

Below is the sample merchandise plan we built to illustrate. We’ve simplified it and highlighted the “receipts at cost” line, re-labeling it “open-to-buy budget”:

In this view, our buying budget for the department “sportswear” for the season is $33,750 in cost dollars. Once again, if you are setting your budgets at gross wholesale cost or cost net of discounts, just be consistent with how your system reports and how you prefer to track the data.

This is straightforward enough. You have a budget, you head out to the buying shows or meet with your vendors in the store, and you have a clear idea of how much you can spend, to be received each month, once again assuming your sales forecasts are correct and you haven’t carried in more inventory than you planned to from the winter season.

But what happens once you’re into March and things, well, haven’t gone exactly how you planned? We know that’s probably never happened to you, but humor us for the more fallible buyers if you would.

We’ll take a closer look at two examples…

In scenario 1, we carried in more stock than we planned for due to a poor winter, and on top of that January and February underperformed versus the plan we made. Let’s assume we spent 100 percent of our OTB Budget at preseason time. Let’s also assume we were busy with other things and didn’t interrupt the flow of goods coming into the store in January and February. It’s March 1 and we just spotted the problem:

As you can see, in Scenario 1, at the end of December, we carried in $4,000 more stock than we had planned for. Either Santa fell down on the job, our hunch that aquamarine was the new black was wrong, or it was 80 degrees all December. One way or another, we came in heavy. And then, to add insult to injury, our sales in January were short by $1,000 and again we fell short in sales in February by $1,200, further increasing our inventory at cost.

The result is we are $5,100 overbought for the season and we have a decision to make.

Do remember, open-to-buy is not federal law or divine mandate. We still get to decide what actions to take, if any.

Given the above scenario, if you were the buyer in charge of making a decision, you might elect one of several options:

1. Hold firm that each department needs to perform exactly as planned, and cancel some of the upcoming open orders to make the plan work out at season’s end.
2. Let it go, knowing that the store has other departments that are performing better than plan and it will all balance out.
3. Wait to see if the shoppers who held off in the first two months come back in droves as spring progresses — this would be the Wishful Thinking School of Merchandise Management.
4. Take other management action, such as re-displaying the goods, offering incentives to sales staff or running an ad.
5. And, to be sure, next season you may plan differently and hold back some of that open-to-buy to allow for variances and provide you the chance to chase product in-season.

Now here’s another view of the same plan, with different and more favorable results:

In Scenario 2 above, we came in lighter than we planned in inventory at the end of December: $4,000 versus $7,000 at cost and our sales in both January and February beat plan. As a result, we have money to spend. In fact, we’ll likely have to spend in order to realize those sales in the latter months of the season, unless we think our prediction of the demand for colors and sizes was perfect.

In this case, again, you have decisions to make if you were the buyer in charge:

1. Buy into the plan by contacting your vendors for their available to sell to fill into the styles that fueled the sales growth. Often, vendors’ closeout lists offer an opportunity to bolster stock at discounted prices, and as a result bolstering your gross margins.
2. Do nothing and be satisfied you will still beat your plan and that this department can help offset others that under perform.
3. Recognize and thank your sales staff for a job well done…this should be a given if you want to remain successful as a buyer and keep your sales team buying into your future merchandise plans.

Whatever actions you elect to take, your job is not done simply by looking at your business at this level. Drilling down into the classes of goods or the specific styles that are either bogging you down or making you exceed your original plan is required in order to fully understand the causes and then to take the appropriate actions.

These two examples give us a very general introduction to in-season open-to-buy management. Next time, we’ll talk about preseason strategies to ensure your’e as prepared as possible for rep visits and upcoming trade shows. 

Have a question that is not answered here, or an observation, or even a better way of going about the business of retail merchandising planning than we have offered up? Then the SNEWS® Retail Merchandising Training 101 Forum is for you. Click here to enter a private chat section open only to SNEWS® subscribers.

This article is part 6 of a 10-part Retail Merchandising Training series produced by SNEWS® and authored by Michael Hodgson and Geoff O’Keeffe. SNEWS® president Michael Hodgson, in a former life, was a manager for five years with Adventure 16 and the general manager overseeing a team of buyers and store managers for three years at Western Mountaineering. In those roles, he learned, sometimes the hard way, how to make a living and make a profit (or not) in the world of specialty retail. Geoff O’Keeffe has held retail senior management positions at Granite Stairway Mountaineering, Adventure 16, Patagonia and PlanetOutdoors.com, as well as having served as president of Lowe Alpine Systems USA and Mountainsmith. He is currently the vice president of operations at American Recreation Products, which he is managing to fit in while working on new projects at his home in the mountains above Boulder, Colo., where he is a fourth-generation resident.