Tuesday, 9 October 2012

Opens to Buy

I’ve been talking about the ARMS system, however Focus Business Management Institute is a company which also espouses the same general principals for retail operations; as its’ founder was a partner in ARMS.  If you missed Sunday’s article, make sure you review it before reading today’s.

If fast-selling merchandise is always repeated, then the only way to adjust your inventory up or down is through the management of your open-to-buy.  In other words, when you sell $35,000 at cost in one month and $25K was from fast-sellers and $10K from slow-sellers, the former is automatically replenished in your inventory and the latter is your “open-to-buy.”  If you spend that $10,000 on new designs, your inventory remains the same. 

When you are trying to reduce your overall inventory, you can spend only a portion of your open-to-buy.  In our scenario, by spending 50% of your OTB, you will have reduced your overall inventory by $5,000 or by spending only 75% of your OTB, you decrease inventory by $2,500.  If you’re looking to add another line to your store, and the buy-in is $15,000, you’ll have to take your entire $10,000 open-to-buy and $5,000 from cash-flow (or heaven forbid, from fast-seller purchases) in order to make that investment.

Here’s why I feel this is important to understand.  You want to develop an inventory which includes increasing amounts of fast-selling, profitable designs so that you can enjoy growing, profitable sales.  Suppliers want the same thing.  If you promptly reorder fast sellers, and use your open-to-buy with the same suppliers to seek new fast sellers, your inventory investment can stay the same, while profitability increases for both.  When this happens successfully, the supplier will be highly motivated to help you out with stock-balancing and other services that are extended to their best clients.

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