I’ve written about Open-to-Buy programs for Independent Retailers and how difficult they are to manage.
For those of you who have also struggled with the OTB’s and want a simpler, more intuitive way to manage inventory and cash, here is a plan you can follow…
First, understand that the ultimate goal is to have the right products at the right time at the right price. There are three simple rules that apply no matter what…
- Don’t out-buy your terms. If you get Net 30 (30 days to pay the bill), try not to buy more than 30 days worth of products.
- Don’t buy anything you don’t want. Padding an order just to reach a new discount level rarely works. You usually end up marking down those extra items that you were never fully convinced of carrying and lose any discount in the process.
- With the exception of December Dating (for businesses that do most of their sales during the holidays), smaller orders done more frequently is always better than one or two really big orders per year, regardless of the specials.
Post those rules at the top of any OTB plan you decide to use. With those rules in mind, here is my plan…
PHIL’S SIMPLE OTB
Rank Your Vendors
The first thing you need to do is rank your vendors. Split them into three tiers.
- Tier #1 – your top-selling vendors that help define your store, have the most of your ‘must-have’ products, sell through the fastest.
- Tier #2 – your second level of vendors who have great products that you love to carry and sell, who are profitable and have generous terms, and who have a few of your ‘must haves’.
- Tier #3 – all of the other vendors who are left including seasonal customers.
By knowing this information, you have a better idea of which vendors deserve more of your attention so that you do not spend your limited resources in the wrong places.
Break it Into Quarters
The next thing you should do is break up your buying schedule into the four quarters. Plot them out on a calendar. You can use the standard calendar quarters (Jan-March, April-June, etc) or break it up whichever way makes sense for your business. Some summer-based businesses consider June-August to be their “4th quarter”. Label each quarter with what is most important for that quarter. For instance, you might label 1st quarter “Prepping for Easter”, 2nd quarter might be “Outdoor and Summer”, 3rd quarter might be “New Releases” and 4th quarter could be “Christmas!!!”
Just by labeling each quarter you get a clearer picture in your mind of where you need to focus your dollars. The mental aspect of this simple activity will alone make a huge difference.
Schedule Your Vendors Each Quarter
Here is the meat. After you have done the first two steps, take your tiered vendor list and write into the first month of each quarter all of your Tier #1 vendors. Write Tier #2 vendors into the second month. Write Tier #3 vendors into the the third month.
You’re almost done.
Now look at each quarter a little more closely. If there is a Tier #2 vendor that is more important to that quarter, move it to the first month. But be sure to move a Tier #1 vendor to the second month to compensate. Do the same with any Tier #3 vendors, especially the seasonal vendors.
Now you have a comprehensive buying schedule to follow for your year that will help you manage your inventory and cash flow a whole lot better. Each month simply look at your list of vendors and write your orders accordingly – being sure to follow the rules at the top.
Adjust, Adjust, Adjust
Sure, you will have to adjust regularly. You might get to a new quarter and find you don’t need to order a line, or you might run out before the quarter is up. All OTB’s require constant juggling and tweaking. Just remember that for each time you add a vendor onto that month’s buying list, you should move a different vendor out to compensate. By having a list, you are now making those choices consciously.
Sure, sometimes you cannot buy within the terms, or sometimes you need to over-buy just to make sure you have enough product for the busy season because you know the company will run out. Those issues will usually be offset by the line that moves so fast you find yourself writing eight to ten orders per year.
Sure, sometimes your cash will be tight. you might spend it all up in that first month of the quarter. But at least you spent it on the most important lines for your business.
If you follow the guidelines as much as possible, you will see the payoff in the long run.
If you are placing at least four orders per year for all of your vendors, your Turn Ratio will likely outpace your industry (most hard-goods retailers like clothing, toys, hardware, furniture, etc expect about a 2.5 to 3.5 turn ratio – perishable goods like florists and grocery have much higher terms and much different OTB’s – and four orders per vendor per year typically yields a 3.6 turn ratio or higher).
This will increase your cash flow, while also keeping your store well-stocked.
Remember, Cash is King (and you are the adviser!)
PS For more on how to manage your inventory better including an understanding of how to calculate Turn Ratios and Gross Margin Return on Inventory, download my free eBook Inventory Management.
PPS For a list of Turn Ratios by industry go to this article on Rick Segel’s blog.