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Buying with an OTB Plan

We partnered with Todd McCormick, Owner of Keystone Climbing Consultants to bring you a series of gym-focused retail optimization articles.

Buying with an OTB Plan

By: Todd A. McCormick, Owner of Keystone Climbing Consultants

Almost every climber I know uses chalk, and if they are like me then they use a lot of it! And since chalk is a consumable product, it’s something your customers need to keep buying over and over. But how much chalk should you stock? What’s too much or too little versus the amount that’s just right? A key aspect of running a successful retail shop is cash flow. Cash flow is the process of buying products, selling them, and then taking that revenue and reinvesting in more inventory. Having a plan of when to reinvest and what products to reinvest in is called an OTB plan, or Open To Buy plan.

An OTB plan is a predetermined budget that guides your purchasing decisions to be prepared for the expected demand in the coming months. Without a buying plan, it’s easy to over or under stock your shop or possibly invest in a sub-optimal product mix. Sometimes mistakes like these can’t be avoided (ahem – like in the event of a pandemic), but an OTB plan is a guide to help avoid having such issues. Better inventory management with use of an OTB plan can also help you increase profits, for example, by placing better forecasted pre-season orders which give you product discounts as well as helping you avoid missed sales from being short on stock. 

Here’s the basic formula for OTB at cost:

OTB (Purchasing $) = Forecasted COGS + EOP Inventory – BOP Inventory – Open Orders

(EOP and BOP are End of Period and Beginning of Period, usually this is in months so you might see elsewhere EOM and BOM)

Notice that the formula uses forecasted cost of goods sold, which is the value of your inventory that you plan to sell. Once those sales actually happen, you may have more or less inventory than what you planned for, so your future purchases need to adjust accordingly. This might also change assumptions about future sales if you’re seeing changes in buying patterns that you didn’t predict. I update mine monthly with actual sales, and then update any goals/forecasts that might have changed, and finally update any purchases that have been planned out but not yet received.

An OTB plan is driven by your planned turnover. So, it’s essential to start with a goal for how many times you want to turn your inventory. This depends on a few things: the space you have available for inventory, the capital you have to invest in inventory to begin with, and the amount of inventory you want to have on hand at the end of a selling cycle to be ready for the next season. Ideally, you’re out of some products, like winter jackets at the end of the cold season, which makes room for inventory that sells during the summer months.

FEATURED PRODUCT
FEATURED PRODUCT

If you’re deciding to use an OTB plan, then you need to decide if you’re going to calculate everything at cost or at retail value. Choose what works best for you (I will use at cost value throughout) and be consistent so you are not mixing up data that’s at cost with data that’s at retail value.

For reporting and planning purposes, your products should all be defined into three levels. First is the category level, then sub-categories, and then every individual product. For example, “Climbing Basics” could be a category, “Chalk” could be a sub-category, and then Bam Bam/Unicorn Dust/Gorilla Grip are the individual products that make up this sub-category. Brands should be differentiated at the individual product level because you could have products from the same brand in several different categories and the products that a brand carries could change over time. Your categories and sub-categories should be static and should describe types of products within each one. Finally, different sizes and colors are attributes of each product and are usually listed as “sub-items” under each product. 

FEATURED PRODUCT
Get It
FEATURED PRODUCT
Get It

A sophisticated program can show you an OTB plan at any of these levels, but it’s possible that you stock several hundred or even thousands of different individual products (taking into account all different sizes and colors of every product). Planning out purchases of every individual product is overwhelming and time consuming, so I prefer to plan at the sub-category level which gives enough information to be helpful and guide my purchases without giving me a headache. There will also be more variability introduced at the individual product level and getting a purchasing plan perfect for every single item you carry is unlikely. Especially now since we’re all dealing with stock shortages as result of supply chain back-ups due to the pandemic.

If the plan is suggesting a spend of $2,500 in the “Climbing Basics – Chalk” sub-category, then that’s reasonable to work with and you can shift around what individual products you purchase depending on what’s available from your vendors to make up your total spend for that sub-category. Once you have defined all of your products into categories and sub-categories, then they need to be permanent because your OTB plan relies on actual sales history. If you later decide you want chalk to go in a different category, then you’re going to throw off every other sub-category that was under “Climbing Basics.” So, once you start using a plan and have your products defined, then keep it consistent!

Let’s try it out.

We want to come up with a plan for how much loose chalk to buy in the coming months. The following steps are highlighted in green in the chart below:

  1. Initial Markup is 50% because I buy Friction Labs by the case to get the best margin.
  2. Planned COGS is always 50% of Planned Sales (since my markup is 50%).
  3. We actually sold $1,000 in December; January through June are planned sales.
  4. We see chalk sales correlate with number of check-ins at the facility which is expected to increase 5% because of a membership drive we are starting in January. So, we’ll plan for 5% increase in loose chalk sales per month over the course of our plan. You’ll see this in January through June in Planned Sales below.
  5. We want to operate on 6 turns of loose chalk per year (keeping a 2-month supply at a time) so my BOP inventory for Dec is $500 x 2 = $1,000, because I’ve been selling $500 per month at cost leading up to this plan. 
  6. BOP Inventory is always equal to EOP Goal from the previous month.
  7. Since I want to maintain 2 months of inventory on hand, my EOP Inventory Goal is the sum of my planned COGS for the coming 2 months. For example, EOP Inv Goal for Dec is $525.00 + $551.25 = $1,076.25.
  8. To reach my EOP Goal in December, I need to buy $576.25 worth of loose chalk. That comes from my Planned COGS ($500) plus EOP Goal ($1,076.25) minus BOP Inventory ($1,000).
  • OTB (Dec): $576.25 = $500 + $1,076.25 – $1,000
  • And for January: $578.81 = $525 + $1,130.06 - $1,076.25, and so on.

My plan stops in April because my EOP inventory goal relies on the following 2 months’ worth of projected COGS, and I have only projected sales planned through June. What this plan is telling me is that in December I should have purchased $576.25 worth of loose chalk to have enough inventory in the beginning of January to be prepared for expected sales that month plus expected sales in February.

Remember this is just a guide. Once each month is realized, then you can turn your projections for sales, COGS, inventory levels, and purchases into actual values, and then make predictions for sales and COGS one month later in your plan. This will allow you to always have a plan for purchases in the coming months, this should help avoid missed sales from being out of stock, but also keeps your inventory in check so that you aren’t buying too much. If we over or under perform from our projections, then the OTB for the coming months will adjust accordingly. Take your revenue and reinvest it thoughtfully with the help of your OTB plan.

After all, happiness for your business is a positive cash flow. What are you waiting for? Go make sure your chalk levels are just right!

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