Ep. 118 Start with Inventory Turn Before You Try Open-To-Buy
Most independent retailers don’t have any formal retail merchandising training or education. We’ve learned how to run our retail businesses through trial and error, often without a strategy a plan.
So when retailers hear about Open-to-Buy, or OTB, it sounds really appealing! A tool that tells us when to buy, how much to buy, and keeps us on budget and profitable sounds like the magic solution to inventory issues. But really, Indie Retailers should learn about Inventory turn FIRST.
There’s a lot to learn and do before implementing OTB. Let’s get into exactly what OTB is and what you need to have in place to use it.
What is Open-To-Buy?
Open-to-Buy (OTB) is a system for managing purchasing dollars in relation to sales and inventory levels.
It’s a tool you can use to keep your store profitable by…
- making the best use of your buying budget/dollars
- planning purchases
- controlling inventory levels
- informatively forecasting sales
Everything You’ll Need Before Using OTB in Your Micro-Retail Store
Although there is an OTB formula, I’m not going to cover it here for now. Instead, let’s look at what we need to have in place before hiring or figuring out OTB.
Preparation is necessary
Retailers can’t just jump into OTB—you have prep work to do! Whether you do this yourself or hire an agency to do it is up to you. Consider reading this blog post as part of your prep work!
You need a sound inventory system
Your inventory system needs to be up-to-date, with all of your items accounted for and a cost attached to each item. Your inventory also needs to be categorized so you can calculate both your total inventory and your inventory by category. Lastly, you’ll need to be comfortable running and reading reports from your inventory system.
You might be surprised at some of the reporting your system offers. Listen to Episode 20 for more information on inventory management reports!
Also needed: one year of clean data at your disposal
To do any kind of analytical work, it’s always essential to have data—and “clean data” at that.
Your data is clean when your inventory counts are accurate and all fields, including costs, are filled in. Reconciling your counts regularly can ensure your data stays clean.
Additionally, it’s helpful to have a full year of data available so you can see the complete picture.
If you’re in one of Savvy Shopkeeper’s group memberships, check out this lesson on Inventory Management for more guidance.
A solid understanding of your data & inventory turn
In the online business world, people often say that you should learn how to run Facebook/Instagram ads before you hire them out.
The same logic applies here, too. You need to understand the categorization of your products, how to calculate your inventory turn, and what the results mean for your business.
If you’re a group member, review this lesson about Inventory Turn and use the Inventory Turn Worksheets found in the CEO module.
Inventory turn is something I know micro-retailers can figure out and use. I know this because I’ve been teaching it, and group members are learning it! It’s an incredibly helpful tool that I use for my own business.
I use the Savvy Shopkeeper worksheets to calculate this in early January before heading to AmericasMart. It’s so insightful. Even when we think we know our businesses, customers, and what they’re buying, doing this exercise can still surprise you! Trust me.
I’m enlightened about my business, particularly the performance of product categories, every darn year. For example, one year, I learned our baby category was moving slow enough that I should not dedicate as much square footage to this display in our store. I also learned kitchen goods is a growing category for us, but I had no idea until I did my inventory turn exercise.
Your Open-to-Buy Options
If you have a good system in place, one year of clean data, a solid understanding of turn, and the ability to calculate it for your store, you’re ready to look into using open-to-buy.
There are POS systems with an OTB module or tool. If you can access/pay for that, it’s probably worth considering. Two of the most popular systems for store owners in the Savvy Shopkeeper community are Square and Shopify. Unfortunately, neither have this function that I know of. There might be an app for Shopify, but I don’t know for sure, and I definitely don’t know if it works well.
Otherwise, you can hire an agency or consultant to do this for your business. From what I’ve seen, you can expect this to cost $300-500/mo. They take a percentage of your sales.
In the future, I’ll be adding an OTB spreadsheet to The Shopkeepers Lab. It’s only available in Master Shopkeepers as I test and validate it for the time being, but I do want this to be a resource for shopkeepers in our communities in the future.
Conclusion
To wrap things up…
I know the Savvy Shopkeeper community pretty well. For that reason, I feel confident saying that many retailers in our community probably aren’t ready for OTB or aren’t prepared to hire this out.
I also feel confident that Googling about OTB will only leave you confused, annoyed, and frustrated.
OTB articles and videos beeline to giving you the formula. However, the content in the articles you find DO NOT COVER what you need to already have to use OTB properly.
This is one of the many reasons WHY I started Savvy Shopkeeper—I would spend hours Googling and still not feel as if I truly understood an essential aspect of my retail business! As I worked on this podcast episode and blog post, I could feel the years of my frustration oozing out of me! I know this might be how you feel, too.
All this to say: yes, OTB can be an extremely helpful tool for retailers. Yes, you can take some steps towards calculating OTB for yourself, and/or you can hire it out.
The biggest takeaway from this episode is this: if you invest some time into building a solid inventory management strategy AND you learn about inventory turn, you’ll be well on your way to implementing OTB.
Resources
- Shopkeeper Shoutout: Leann Miller of Porto Interiors
- Join The Shopkeepers Lab
- Apply to join Master Shopkeepers
- Ep 20: Why Inventory Management is So Important
- Inventory Management lesson in The Shopkeepers Lab
- Inventory Turn lesson in The Shopkeepers Lab
- Inventory Turn worksheets in the CEO Module of The Shopkeepers Lab
Timestamps
- [01:56] What is Open-to-Buy?
- [05:41] Everything You’ll Need Before Using OTB in Your Micro-Retail Store
- [14:10] Your Open-to-Buy Options
