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| A retail myth busted |
   
Posted Date: 09/02/2012
By Stuart Bennie
It never ceases to amaze me how even some large retailers don’t understand these basics, but sadly it’s true.
Here is one great myth debunked. “Open To Buy is too complex for my business”.
Many small or medium retailers tell me that they do not have an Open to Buy system and they fear it is too complex for their company.
And yet it is one of the most basic and simplest planning tools available. Yes – a bit of a blunt instrument these days ,but still enormously useful both to merchants and financial folk who have to plan cash flow.
OTB became somewhat shrouded in mystery, probably dating back to the arrival of retail planning software in the 1980’s. However before that retailers used to calculate OTB manually using a formatted sheet of paper, an eraser and a pencil. The arithmetic is very simple and some might say that doing it manually gave the merchants a hands on feel that can be lacking today.
It can certainly be handled on a very basic spreadsheet with not a great deal of manual entry.
Basically it entails setting sales budgets going forward (something you should be doing anyway), setting corresponding stock levels to give you the optimum stockturn and calculating the resultant “open to buy” or what you have available to spend each month.
For fashion retailers where markdowns (especially planned markdowns) play a significant role, it is essential that the OTB is run at retail while it can be run at cost at the same time.
Planning at Retail
Planning at cost makes imminent sense for commodities where markdowns are insignificant.
However where markdowns (or shrinkage for that matter) are material, it is important to run the OTB at retail so that you can ensure that you have sufficient inventory to compensate for what you are marking down (or losing to theft).
Some retailers will plan several types of markdowns – permanent markdowns either because the merchandise is not popular or may be damaged, promotional markdowns where goods are bought in with the aim of marking them down; for example, sale time, or price breaks where prices are reduced for a period and then return to the normal retail.
All these are easily catered for when planning at retail.
The Retail Inventory Method (RIM)
The Retail Inventory Method is often confused with planning at retail while it is really quite a separate issue. Prior to the computing power that has been available for many years now, it was quite usual to use this system especially when there were high volumes to determine the cost of inventories.
The selling value was discounted by using the current average mark-up in the category expressed as a percentage of the selling price. This could result in items being measured at less than cost and when those items were sold, the normal gross profit was then achieved.
Therefore the ATO only allows the RIM to be used to determine the cost of inventories when it results in an amount reasonably approximating the lower of cost and net realisable value.
In any case, there has been little need to use the RIM for some time now because it is relatively easy with computers to calculate the exact margin on every article every day.
In summary, if you are a small or medium store operator and don’t have an OTB, get one, or develop one on spreadsheets.
If you are a fashion retailer elect to plan at retail to cater for markdowns (but keep cost going too). And don’t get confused with RIM and planning at retail.
The safest course is to calculate the margin on every item.
And remember it’s a myth: Using an OTB system is never too complex for your retail business.
Rather it is a critical tool.
*Stuart Bennie is a retail consultant at Impact Retailing and can be contacted by email |
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