The Open to Buy

The Open to Buy is a highly effective blunt instrument used by most general merchandise retailers to plan their purchasing and control inventory. I am sure many of the readers of this article are familiar with this tool and it works pretty well – most of the time. Of course there are other ways to budget one’s stock requirements.

Allow me to relate a real life scenario. My father in law recently wanted to purchase some white pillow cases, an item you would think would be readily available at any number of retail stores. He was not even particularly fussed about what brand they needed to be, but they did need to be the appropriate size and have a certain fabric composition. So off he went to a well-known multi-site general merchandise store.

The first of these stores was out of stock. He asked the sales assistant whether the item was a slow seller. “Oh no” she said “It is one of our top sellers, but we always seem to be out of stock. Why not try another of our stores?” He asked her to please call ahead to ensure that the other store was in stock. The rest of this salutary tale is predictable, and resulted in considerable frustration!

The problem with OTB and similar budgeting tools is that unless one has a robust system to ensure that core items are always in stock, lack of budget can lead to out of stocks of your best sellers. And there is no better way to irritate a customer than to be out of stock of a basic item.

It is human nature for buyers or planners to allow money to gravitate towards new and exciting product while the more mundane items are overlooked. It is therefore essential to divorce regular buying from core item replenishment. It is desirable to go one step further and to utilise an automated replenishment system. This can be provided by a third party or be a home grown system. The home grown alternative is frequently considered the cheaper option but often does not work out less expensive especially if one includes the ongoing maintenance and management. Invariably the better option is to delegate the responsibility to a professional provider which has software more sophisticated than any legacy system, and where the disciplines are part of the deal.

Another option is to delegate the replenishment of goods to the supplier. Whilst you may think that ‘vested interests’ would interfere with due process, there are many great examples of VMI (vendor managed inventory). As long as the retailer’s and the supplier’s interests are aligned, and certain parameters are adhered to, this can be a very effective way of leveraging the supplier’s knowledge to optimise stock distribution. In all instances however, a high degree of mutual dependence is required between the retailer and the vendor. If this is abused, the system is doomed.

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