When Cadence Kidwell opened her yarn shop, The Fuzzy Goat, she was fresh off a career in academia. Without any retail experience, she relied on two things when stocking the shop: her gut and vendor minimums. She bought what she liked and she kept buying until she hit the vendor’s minimum order amount. Her inventory was, as she describes it, chaotic and it took months to learn whether her instincts were correct.

Faustina Konkal also relied on her instincts when she began ordering inventory for her craft store, Fabrications Ottawa. Once the 2020 pandemic hit, her business grew exponentially – by 84 percent! She quickly realized that she had no idea how to manage that kind of inventory expansion. It felt, she says, “like a runaway train.”

Since that time, both shop owners adopted a retail strategy called “Open-To-Buy” to reshape the way they order inventory. The results: higher profitability, quicker turnover of stock, and the confidence of having a results-oriented plan to guide them.

What Is Open-To-Buy?

Most retailers have struggled at some point to find a balance between ordering too little inventory and ordering too much. If you don’t order enough product or order at the wrong time, you may end up with empty shelves and lost sales. If you order too much, your cash flow may dry up, leaving you unable to pivot to new products while the ones you have sit and gather dust. Open-to-Buy (or OTB) is a strategy designed to help you order the right amount of inventory at the right time.

The logic behind OTB is easy. Before you order more stock, you figure out what you already have, including what inventory you’ve already ordered. You compare what you have to what inventory you expect to need. A simple formula determines how much money is available for purchasing more inventory. OTB allows you to match your spending to your sales projections.

One big advantage of the OTB method is that it uses your company’s own metrics to guide your decisions about inventory. There’s also flexibility built into the system so you can adapt it to your business’s individual needs. Once you start using the formula, it becomes a standard practice, like balancing your checkbook every month, says Cadence Kidwell.

Calculating OTB

Most retailers evaluate data and make projections on a monthly basis, so we’ll use monthly metrics when we look at the OTB formula. To figure out your business’s OTB number, you’ll need the following data:

• How much inventory you’ll have at the beginning of the month;
• Your expected sales for the month plus any markdowns;
• How much inventory you expect to have at the end of the month; and
• How much inventory you’ve already ordered.

You then plug this information into the OTB formula to determine how much cash you have to spend on new inventory.

The OTB formula most retailers use looks like this:

(Projected sales + planned markdowns + ending inventory) minus (beginning inventory + inventory already ordered) = OTB

Let’s look at a concrete example. Consider Kate, a fictional owner of a craft store. Kate would like to calculate her OTB beginning with the month of October. She uses sales projections and historical data to fill in the columns for October.

Then she plugs those numbers into the OTB formula:

• Adding sales plus markdowns ($18,000) to how much inventory she expects to have at the end of the month ($20,000) = $38,000
• Combinng the beginning inventory plus inventory already ordered ($30,000 + $2000 = $32,000), then subtracting that from the first number ($38,000 – $32,000 = $6000).

Kate’s OTB number is $6000, which means she can purchase $6000 in additional inventory in October.

Putting OTB To Work For You

Once you start calculating your OTB number, you can tweak it to your specific needs. For example, while most retailers do monthly OTB calculations, Faustina Konkal knows some retailers who do quarterly calculations, which may work better for companies with seasonal patterns. Or you could prepare weekly OTB projections if you’re in a business environment that moves very quickly. Cadence Kidwell, who uses monthly OTB calculations, frequently checks her OTB numbers mid-month to gauge progress. She also consults them when she sees a cabinet or shelf start to look empty, making sure she has open capital instead of rushing to order new product.

Both Konkal and Kidwell break their OTB down into specific products or categories of products. Konkal calculates individual OTBs for about 25 categories, taking into account that different types of product move at different speeds. She uses separate categories for types of fabric (quilting cottons, solids, jerseys, widebacks) and for different types of tools (rulers, cutting tools, scissors, quilt patterns). Breaking down the numbers by product has been particularly instructive for Konkel. When OTB numbers indicated that the shop should stock more fat quarters, Konkel initially resisted, believing that they didn’t sell that much. After she saw that fat quarters accounted for a higher percentage of sales in that category, she began adding more. (The shop originally stocked about 1500 to 2000 individual fat quarters, but now stocks 4000 to 6000.) She also decided to cut an entire product category based on her OTB plan. “I was able to strategically clear out almost $60,000 of inventory in three weeks, get back the money that had been invested in that product and turn it into faster-moving product categories.”

Cadence Kidwell also credits the OTB process with helping her avoid product bias.

Before using OTB, shopping by instinct, or “gut buying,” she explains, “has a very consistent bias and the bias runs toward whatever the owner personally likes.”

Cadence realized that her pre-OTB inventory looked a lot like her own yarn stash. “That’s a lovely thing for me but a narrow thing for a store that needs to sell to a few thousand different people with different hands, different budgets, and different projects.”

Faustina Konkal also credits the OTB process with improving her relationships with sales rep. She places orders quickly and strategically, unlike shop owners who don’t have a clear idea of what they need to stock or how much to spend. Sales reps, in turn, enjoy dealing with Konkal and tend to put her at the top of their priority list when new items are released.

Of course, the critical measure of an inventory plan is the bottom line. Both shop owners have been thrilled with the results of using OTB. Konkal’s shop is now more profitable, turns products faster, and better focuses on items that reflect customer demand. She points to one product, scissors, as an example; taking cues from her OTB analysis, her shop went from selling about $5000 of scissors in a year to about $25,000 a year – a huge increase.

Cadence Kidwell agrees, particularly when she compares sales against inventory. As of this August, she was running about 15% ahead on sales even though the shop was carrying 21% less inventory. “Without OTB I would have money sitting on shelves in yarn that wasn’t moving, and none available for what customers were actually asking for.”

Carol Sulcoski

contributor