Open-to-Buy Made Simple Running Conference 2006 Presented By : James E. Dion Sponsored by ASICS OTB Myths OTB is only for fashion stores OTB does not work with basics OTB is complex and constraining OTB budgeting is difficult OTB is not for Running Stores 1
OTB Realities OTB leads to greater productivity OTB works with basics OTB is not complex OTB leads to better customer service OTB improves cash flow Facts Most running stores carry two to three times more inventory than necessary Most running stores penalize their customers for their own mistakes Many running stores have no idea of how much inventory to purchase each month 2
Fact Most inventory is just in case it must be "just in time Not FISH You are not running a Running Museum, or are you? Why at Retail Value? Always buy at retail because that is what your customer does! Your cash flow in is at retail Your sales budgeting is at retail If you have deals at high margin an open to buy at cost can put you way over budget 3
Examples OTB @ retail = $10,000, you buy 100 items at $100 retail, you are OK OTB @ cost = $5,000, you buy 100 items at a cost of $50 each to sell for $125 each, your inventory is now $12,500 or $2,500 over at retail value. The same is true in the reverse, if you take a low margin, you will have OTB left over A Merchandise Budget Is Key Class / 24 FEB MAR APR Sales 8000 14000 16000 Stock (BOM) 18000 27000 30000 S/S Ratio 2.25 1.93 1.88 Mark Downs 500 200 300 Open To Rec. 17500 17200 On Order 10000 7000 Open To Buy 7500 10200 4
Open To Buy Begins With Sales forecast: External factors.... Internal factors..... Then asks the question, How much inventory do I need to support my sales plan? What Is Stock To Sales? Stock to sales measures the amount of inventory that we have in a period (usually a month) as it relates to sales 5
Why Is Stock To Sales Important? The stock to sales ratio can quickly tell us whether we have the right level of inventory based on projected sales Stock To Sales Ratio Calculation Inventory (BOM) = Stock to Sales Ratio Sales 6
Productivity Real productivity is about doing more with less Anyone can sell more with more inventory The real trick is to sell more with less inventory OTB is best done by Category Total Store Department Category (classification) Sub category (sub class) A Category (Class) is a grouping Line (or vendor) or assortment of merchandise Item that the Customer finds SKU interchangeable 7
Turnover Measure of velocity of movement of inventory. Formula Net sales Average inventory at selling Example $250,000 $50,000 = 5 Turns Turnover: Benefits Lower inventory investment Lower inventory risk Less space Fresher product Always something new to show your customer Lower selling price (maybe) 8
Safety Stocks Hide problems Increase costs and risk Reduce or eliminate profits Are excuses for poor management Ultimately decrease service levels Inventory level $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Problems hidden 9
Problems exposed $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Inventory level Economic Order Quantity EOQ COST UNITS PRODUCED / SOLD 10
EOQ = 1 11
Which Is The Japanese Plant? A B What is the difference between 60,000 bumpers and 60,000 socks, shoes or widgets? 12
Paradigm Shift RAW MATERIAL WASTE CONSUMPTION $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ EFFICIENT $$$$$$$$$ Always seek the shortest distance/time from raw material to consumption Open To Buy Formula Desired EOM inventory Plus sales and markdowns Minus BOM inventory and on order and receipts Equals open to Buy 13
How Do We Calculate The OTB? Desired End of Month (EOM) + Sales + Markdowns = Inventory Required Beginning Of Month (BOM) Inventory = Open to Receive On Order = Open To Buy $27,000 (Feb. EOM = Mar. BOM) $8,000 (Feb Plan) $500 (Feb Plan) $35,500 $18,000 (Feb BOM) $17,500 $10,000 (Feb On Order) $7,500 Caution In your merchandise planning, never try to improve your stock turn by greater than one half turn per year! 14
The Secret of Buying Don t Buy What Won t Sell! Remember Try to never buy more than you will sell in three months two, or even one month is even better Find vendors that can re-supply you on short notice Buy from vendors that ship on time, complete Buy from vendors that allow you to modify your future orders Avoid back orders 15
GMROII Gross Margin Return on Inventory Investment Only financial ROI that returns a $ answer For every $ that you invest in inventory what was the return Measures impact of margin and turn Use to identify good categories/vendors What is the minimum that is acceptable? GMROII Gross Margin $ Average Inventory At Cost $337,500 $137,500 = $ 2.45 16
RIA: Residual Income Analysis Tracks the financial movement of inventory Inventory at cost is measured from payment date of invoice not date of receipt of merchandise Longer payment terms lead to income from interest on vendors money Final Thought It is seldom what you don t have that puts you out of business it is what you have too much of! 17
Thank you & Thanks ASICS!! Keep in touch The Future of Commerce Dionco Inc. Chicago www.dionco.com (312) 673-0187 jimdion@dionco.com 18