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February 25, 2018

Open to Buy

Unlike our other calculators, this one doesn’t automatically calculate answers for you. This topic is too important to automate the math; you really need to internalize this process. So, I have provided tables and a set of instructions

Antique dealers often get into trouble by willy-nilly buying inventory without giving any thought to what they actually need to have. Too much inventory leads to crowded displays, low cash reserves, and unnecessary expenses (like renting storage space to hold excess inventory, for example). Too little leads to lost sales. How much is enough?

The answer to the question “how much inventory do I need” lies in a concept called “months of supply”. The idea is to have enough inventory on hand to stock your store for a certain period of time; how long is up to you. You can stock your store for the next twelve months if you like, or you can stock six months ahead. Or three. Obviously, buying enough inventory to stock twelve months ahead will tie up a lot of money. And, having enough inventory to support sales for the next twelve months doesn’t necessarily mean that you will sell any more this month than you would if you had less inventory.

Say that you decide to stock a three months’ supply of smalls. How much is a three month supply? Depends on which months you’re talking about. Sales of antiques and collectibles are largely seasonal, so you’ll need more inventory in some months than you will need in others.

Let’s examine the charts below to see what our stocking levels might be for a three month supply of smalls. “Months of Supply” can be calculated in terms of dollars or the number of items (if you calculate using dollars, be consistent: either use all retail or all wholesale figures). In the example below, I calculate “months of supply” by the number of items because it’s easier to grasp the concept.

Let’s say that you had a really good holiday season, and you almost sold out of smalls: you had just three left at the end of the year. You plan to sell 8 in January, and you have 3. How many more do you need to buy in order to hit your sales plan? Most people would say 5. They would be wrong. To stay on-plan, you need to buy 35.

otb chart 1

If you have 3 in stock, buy 5 more and then sell 8, how many will you have left? That’s right: none. What happens if a busload of tourists pulls in to your lot and you don’t have any smalls to sell? You’ll lose money, that’s what. So you need to buy more than just 5 so you won’t miss any sales. Here’s the formula for how to plan your purchases so that you don’t miss any sales (based on a 3 month supply), and neither do you buy too much inventory:

(Sales + Ending Inventory) minus Beginning Inventory = Open to Buy

Let’s continue with our chart:

otb chart 2

In February, we plan to sell 12 smalls. We have 30 left over from January. At the end of February, we want to have 36 on-hand (ending inv). How do we know that we want to have 36 on hand at the end of February? Because we looked ahead to March, April and May and added up the number of smalls that we intend to sell in those months (because we’re planning for a three-month supply of smalls). In order to have 36 on-hand at the end of February we’ll have to buy 18. The ending inventory for one month is always the beginning inventory for the next month.

In March, we plan to sell just 8 because traffic drops off in cold, snowy March (or at least it does around here). We have 36 left over from February. But, because we’re coming into the “selling season” we want to have a good selection of inventory on-hand on the first of April. In order to keep a 3 month supply of smalls on hand, we should buy another 24 pieces in March. And so on throughout the year.

The best way to get a “feel” for this process is to sit with a pencil, paper, and calculator and keep running the numbers until you have an “AHA” moment. Then, you’ll never forget the process. After a while, all you’ll need to do is look at your store to be able to predict how much you will need to buy.

Here’s a five-step process for doing your own plan:

Step #1: Draw a 5-column across X 13-row down matrix (1 row for each month).
Step #2: Enter the planned sales for each month.
Step #3: Enter your ending inventory targets according to the months of supply you want.
Step #4: Enter the targeting beginning inventory for each month. This is the easiest step of all, because the ending inventory for one month is always the beginning inventory for the following month. Just slide the numbers over and you’re “good to go”.
Step #5: Now just do the arithmetic: (Sales + Ending Inventory) minus Beginning Inventory = Open to Buy.

At the end of each month, put in the actual numbers that match your ending inventory. You will need to look ahead six months (or whatever interval you have decided on) and buy enough inventory to keep your shelves stocked for the next period. In other words, at the end of the month, according to your sales plan, you will be “open to buy” a certain amount of new inventory (the “months of supply” concept is often called “open to buy” planning).

Following this process will reduce your dead inventory, increase turns, reduce expenses, boost your GMROI (Gross margin return on Inventory) and swell your profits. In other words, this calculation is key to your success as a retailer.

Originally posted 2017-05-11 12:49:39.

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About Wayne Jordan

Wayne Jordan is a Virginia-licensed Auctioneer (#3481), as well as an AIA and CAGA Certified Personal Property Appraiser.

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