In-season OTB management - Part 2

Last time, we have discussed the importance of merchandising budget, basic idea of OTB and calculation. I hope that you all have got the excel model. If you haven’t got it, please do leave a message on comment box. And do subscribe the newsletter. I weekly post articles about category management process, tools used in e-commerce or retail sector.

Before you proceed to Part-II, please read part-I for better understanding.

Last week, we have created a basic OTB plan. This week, we will take it up a notch.

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Summarizing the benefits of having a merchandising plan / OTB plan

• OTB plan helps category leaders to optimize working capital requirement across different categories.

• Inventory control - Manage the risk associated with Inventory effectively

• Help category leaders to find right category to invest, resulting in improved market share and positioning

So far, we have developed the pre-season OTB plan. now, let’s understand in-season management.

WHAT IS IN-SEASON MANAGEMENT?

"A good traveler has no fixed plans and is not intent on arriving." Said Lao Tzu

The merchandising budget is developed before the the season starts. As days passes, we can see that sales might vary from the original forecast. Hence, ending inventory would change. This needs to be fed into our pre-season OTB plans and adjust our inventory requirement and change the purchase order quantity. This is in-season management.

Category managers or merchandising manager needs to reforecast and revise its OTB plan according to changing dynamics in the market.

HOW? Let’s do a case study.

Assume that you are the category manager of a product line called beauty and the beast. Under this category, you sell all kinds of face wash, moisturizers and whole lot of shampoos on your e-commerce website. This is the sales forecast given by your forecast for the month May to Dec-20.

Your inventory turnover is 13. So you know that your Forward week of supply is 52/13= 4 so that means you need to keep next 1 month inventory as your ending inventory.

Note - Inventory turnover is calculated on a yearly basis. and it is calculated based on average inventory through the period. ( BOP inventory for the first month of the year + EOP inventory for the ending month of the year /2)

You have asked your inventory in-charge about how much of the inventory is already available and that is 30000 Rs.

You also know that 10,000 Rs. order has already been placed. So we need to factor On-order or in-transit inventory. That’s the inventory for which order has already been placed. So OTB needs to reduce by that much amount.

Also, you need to account for markdown. because there are some inventory that is not performing well and you need to liquidate.

The amount marked for markdown in OTB plan is the amount that has lost due to reducing prices. For example, if a product is 100 Rs. and marked down to 80 Rs., the markdown would be 20. The total of all the markdowns are being added into the OTB plan because you to buy now extra inventory to make up for the losses due to reduction in price to meet your financial / sales objective for the year.

You have created a pre-season OTB plans for the next season starting from May to October to achieve your target sales revenue. After entering all these data, your OTB plan will be this :

Open to buy =Planned sales + Ending inventory + Markdown - Beginning Inventory

You can see that Ending inventory of May-20 is beginning inventory of June-20.

In the beginning of July-20, you got the actual sales of Month - May and June. With this information, we can revisit the plan and add actual inventory and sales in the model. You also know that people are buying more so you need to reforecast. These are my new forecasted number of July to Oct month.

We have the actual ending inventory for month June so we will use this for July-20 BOP inventory.

When you enter the new forecasted sales, your ending inventory will change in your model automatically. Your actual ending inventory for June month is new beginning inventory for the month July. With this, you can get real-time open to buy number (Retail). You need to multiply this to IMU (Initial markup) to get OTB at cost.

You can download the excel from here.

Read more on OTB here: https://www.thebalancesmb.com/open-to-buy-planning-2890318

See you next week. Till then, take care :)