THE SUCCESSFUL RETAILER
Earning a profit is the reason you are in the retail business . . . and profit comes from the sale of inventory. Inventory is what makes it all possible and is, of course, the largest expenditure most stores make. While many of you reading this have been in business a long time and are quite knowledgeable about what sells in your store, making sure you have just the right amount of inventory can help you improve your overall profitability. That, and the fact that while at market you can concentrate on choosing the right merchandise for your store instead of wondering if you are buying too much or too little, are the primary benefits of a retail Open-To-Buy.
An Open-To-Buy, as you know, is a written plan to help retailers project and control merchandise purchases so that the flow of merchandise favorably aligns with the sales plan ensuring the desired stock turn rate and favorable cash flow. An Open-to-Buy is not a fixed plan but changes from month to month as trends develop at the classification level. Simply put, the goal of an Open-To-Buy is to ensure that there is sufficient goods to meet your monthly sales plan and still have enough left in the end-of-month inventory to begin the next month. A second but equally important goal of the Open-To-Buy is to ensure that there is not an overabundance of inventory on hand at the end of a season; but enough during the season to allow customers a choice of items.
However, Open-To-Buy programs can't work if retailers do not heed the data. Too many store owners depend far too frequently on their guts and not enough on what the data is saying. Buyers immersed in the hustle and bustle of fall or spring markets fall victim to incentive programs or indulge in knowingly purchasing extra inventory without regard to how much is actually needed to meet the sales plan. Then, cash flow may become sluggish-especially if it takes too long to move those extra items out the door.
The Open-To-Buy helps deliver the planned profitability expectations of the company. Additionally, it serves as an early warning when the plans or the purchases are substantially wrong, allowing corrective action to be made in a timely manner. Inaccurate planning or ignoring the plan are root causes of most retail inventory problems. In retailing, early recognition of a negative trend can allow you to cancel orders (even if you make a vendor mad) or to swiftly reduce pricing to minimize future deeper markdowns. Planning is the essential first step in controlling and managing the inventory and the business.
In a 1989 Dallas Morning News article Stanley Marcus mentioned his favorite gardening chore was pruning. He wrote, "I delight in cutting off an unproductive branch here and there or a limb that's going in the wrong direction. I suppose my zeal is reflective of the hard-earned lessons I learned as a retail merchant. My mentors proved to me that nothing would revive dying merchandise and that the faster you moved it from your stocks the more quickly you would have funds to reinvest in fresh stocks that provided the opportunity for profit."
So what changes can you expect from using an Open-to-Buy?
First, you will have to make some time at least monthly to review the Open-to-Buy and be willing to make changes to your plans. Written changes. For example, if you failed to make your sales plan last year by 7% and after 2 months this year you are down 12% in sales, you need to revise your sales plans downward and cancel or reduce outstanding orders or come up with a profitable plan to move the excess inventory. If you take no action, you are choosing a course of higher markdowns, lower profits and the beginnings of a museum collection of merchandise. The Open-To-Buy needs to be faced and dealt with, the good news and the bad.
You also have to consider your sales plan each season or year. While the historic results are a good starting place, there are many things to consider. Easter may be in March or April and weather may make a difference on anticipated sales. Is your store still on the tourist route through the city? What events may bring in visitors from neighboring towns? Is a major road construction project planned around your store? Only the store owner / manager will have an idea on the best answers to these and many other questions that affect sales plans.
On the plus side, diligent use of the Open-To-Buy usually produces faster turnover so that you can keep more cash from sales in your bank account and not spend it on inventory you don't need sitting on your store shelves. In other words, you have less of your cash tied up in inventory.
Just consider for a moment what happens when you have excess inventory. There is a need for additional advertising, insurance, taxes and, if you can get a loan, interest. As cash becomes tighter, vendor payments may fall behind. All that old inventory starts to accumulate, becomes shop worn and worse, fewer customers come in. A funny thing about those customers. Statistics say that a negative shopping experience will be shared with 6 to 10 people; a positive experience with only 2. Just something to think about as you store the winter merchandise . . . again.
Using an Open-To-Buy correctly will also produce higher profit margins. Because it is planned for, the Open-To-Buy intends that discounted, in-season purchases be made that generally permit higher initial mark-ups. In addition, when negative trends are addressed quickly, the result is usually lower markdowns. Both lower markdowns and higher mark ups result in improved profits.
Using an Open-To-Buy to more effectively buy requires some work and a lot of discipline but it will be well worth it in better cash flow and higher profits. And remember why you have a retail store . . . to produce a profit!