First 5 years in Retailing

Today I celebrate my 5th year in the retailing business which began in a small town construction and hardware store, where my primary task is to prepare purchase order, negotiate and select hardware spare parts and construction materials, prepare the weekly collectibles from valued clients.

I remember having this thick leather bound black book that contains all the names of our valued customers who would normally come and buy either their trucking and motorpool spare part needs, purchase cement, plywood boards, enamel paints even just a few grams of construction nails.

I have always fancy to learn all about what the typical hardware stores are like, growing up in a community seeing the mainstream chinese family either has a hardware store or a grocery store.  I choose to be immerse with the former to begin my journey in the whole world of business most especially retailing business.

What differentiates this first hands on job with my succeeding jobs is that, in a regular business, our prices are dictated by customer relationships. We do not have a fixed(set in stone pricing), the price we give our buyers depends primarily if they are new customers, they are given the regular price, a mark up of 30% to 80%, as for our valued regular clients, who normally would ask for discounts, we can go as low as having 10%-15% margin.  So primarily our pricing mechanism is dictated by relationships.

Initially, I've got to learn a whole set of business acumen, negotiation and even hands-on learning of the various merchandise, there was even a time when I have to go underneath a customers vehicle just to check their car muffler if it has a leak on it.  On my own, I thought, I would want to learn everything I have to learn while I'm working at this construction and hardware store, as I would only have to past this way once in my life, if someday I get lucky enough and able to set up my own business, who knows I might be in the same hardware business afterall.

After just a brief stay in my first retail job, I got a job offer from a bigger retailer, this time a construction materials depot which I have to be the Store Manager managing the paints, tiles, electrical, construction materials, furnitures even the doorknobs, nails and screws.  Here I learned to manage people, I acquired the customer service skills.  It was also where I encountered the most vicious amongst customer complaints that one time, a customer came and poked a gun at my face since he purchase from the previous store manager who quit the job and still wasn't able to get the water tanks he needs for his house.  As shocking as it may be to some, but I took it up with much courage to talk sense into him and luckily the customer who is a military official was pacified and got his full-refund.

It was also as a Store supervisor for the construction depot that I learned how to climb display gondolas to check for stacks of inventories on storage atop our selling shelves.  I learned to give motivational sales talk to my sales crew to boost their moral at work and even act as their social therapist whenever they feel downtrodden from so many family and work troubles.  I also learned to come up with sales training techniques to improve the target sales of the team.

After a year, I got a job offer to be a merchandise buyer for a bigger mall, specifically for their department store, to which I have no idea whatsoever is the task of being in merchandising is all about since my first two jobs are store operation related.

I was given 3 weeks to learn everything about the store inventories, clean up the mess, dispose damage merchandise, clean up the inventory system, learn all about Microsoft Inventory System, JDA System, SAP System and even the old-school way of doing inventory, the index card compilation.  It was a juggling task to negotiate with vendors, sellers, create purchase order, reviewing inventories and looking for missing inventories.

I even have to personally take the initiative to work beyond office hours, spend the weekend in the office or in the store back-end to clean up the store mess.  I inherited a troubled department that only sells 1.3M each month during the regular season and 2.5M on a peak month.  I have an overstocked inventories of 14 months(the normal carrying inventory is supposed to be 2.5 or 3 months of the target sales).

With speed and my willingness to learn, improve and prove my worth that I can improve a troubled department, in modesty, I was able to free up alot of inventories, improved the merchandise mix that translated to an improved sales. On my third month on the job, I hit the target sales for the month and has consistently grown the department.  Its now my 2 years and 8 months of handling this department and my monthly target is now pegged at 8M for a regular month and last years peak season, I hitted a staggering sales of 76M, which I supposed makes my boss extremely happy.  She even called me a "Magician", I really don't know why.

I hope to be able to continually linger and still outpaced the target sales in the succeeding years ahead.

What is an "Open-To-Buy"?

In the world of retail, Open-To-Buy is quite a buzzword. Do a Google search on "Open-To-Buy" and over 100,000 references come up, many that are for consultants and software vendors offering Open-To-Buy programs. Many small retail software packages offer an Open-To-Buy module as an add-on option. But there are few retail software packages that include an Open-To-Buy function as part of the core package. As a result, many small retailers struggle to find some way to effectively budget their merchandise dollars. Frequently when I'm talking with a potential client they'll ask, "Do you think I need an Open-To-Buy?" without really knowing exactly what an Open-To-Buy is.

So what exactly is an Open-To-Buy?

The clearest and simplest definition is that it is a financial budget for retail merchandise. Let's look at this more closely.

• An Open-To-Buy relates directly to retail merchandise, is structured specifically to address the needs of retailers, and is a tool designed to assist retailers manage and replenish their most significant asset, their inventory investment.

• An Open-To-Buy is a budget, and involves the full range of budgetary functions. It begins with the planning process, is future oriented, provides guidance on how much to buy, and provides benchmarks for evaluating progress, and adjusting future plans.

• An Open-To-Buy is a financial tool, in that the units of measure are typically dollars, usually retail dollars but sometimes cost dollars, and that it can be tied back to the financial control process.

• An Open-To-Buy can work on any level that a retailer needs it to. It can be used to track merchandise at the company, department, classification or sub-classification level. In rare cases for a small retailer, it can even be used to track an individual item.

Fashion and Seasonal Merchandise versus Basic In-Stock Items

It is important to note from the start, that as a replenishment tool, an Open-To-Buy is not appropriate for all categories of merchandise. It is most appropriate for fashion merchandise where the specific items may change, but the departments, classifications and sub-classifications remain relatively stable, and seasonal merchandise where inventories are brought in at the beginning of the selling season, and need to be managed down to pre-determined ending level at the end of the selling season.

In the case of fashion or seasonal merchandise, an Open-To-Buy answers the question of how much to buy, but not necessarily the question of which specific items to buy. For that, a detailed assortment plan is necessary, which lays out exactly what items will be coming in when, and provides a plan for how all of the individual items come together to form a compelling merchandise assortment.

In contrast, an Open-To Buy is not appropriate as a replenishment tool for day-in and day-out basics. These staple items are more effectively replenished using an automatic replenishment program running off of pre-determined minimum and maximum inventory parameters. In the case of these in-stock basics, an Open-To-Buy may still serve a valuable budget and control function at a department or category level.

Planning

Like any budget, an Open-To-Buy starts with a plan, then compares actual results to that plan and quantifies any variances. Carefully considered planning is the critical first step in constructing an Open-To-Buy.

The planning process begins with building a sales plan. For small retailers, most sales plans are broken out by the month, although in some cases, especially highly seasonal businesses or categories, it may be more appropriate to plan sales by the week. The question to ask is a very basic one: "What is the most likely level of sales from stock (excluding special orders) by month (or week)?"

Once a sales plan has been developed, the next piece of the planning process is to build an inventory plan. The question to ask is this: "How much inventory do I need at the end of each month to support the next month's sales (in some cases the ending inventory may need to support more than just one month of future sales), as well as maintain effective merchandise displays?"

From there, other things like inventory adjustments and markdowns need to be planned.

Finally, from the plans that have been developed, an inventory receipt plan can be arrived at. For any given period (month or week), the planned inventory receipts is the planned ending inventory, plus the planned sales, markdowns and inventory adjustments, less the prior month's ending inventory. Stated another way, the planned inventory receipts answers the question, "How much inventory do I need to bring in to cover my sales, markdowns and adjustments, given my planned beginning inventory, in order to end up with my planned ending inventory?"

The inventory receipt plan serves several important functions. First, it serves as the inventory purchasing plan for future months. While it doesn't tell you specifically what to buy, (you need an assortment plan for that), it does tell you how much you need to by for receipt in each month. Second, because inventory purchases are typically the most significant cash outflow for a small retailer, the inventory purchasing plan serves as a critical input into a financial cash flow plan.

The completed Open-To-Buy plan also enables a small retailer to evaluate, before the season starts, critical inventory productivity metric like inventory turnover and gross margin return on investment GMROI) (see "Measuring Inventory Productivity"). These are critical measures of the productivity of the inventory investment, and evaluating the planned turnover and GMROI allows the small retailer to pro-actively manage these metrics for continual improvement.

In Season

A completed Open-To-Buy plan establishes the critical benchmarks for evaluating exactly where you are once you get into the season. It's after the season gets underway that an Open-To-Buy truly earns its keep. In season, key decisions have to be made about what to reorder, what to back off on, and how to allocate any remaining Open-To-Buy budget.

A well structured Open-To-Buy will present both the plan and actual results, and allow management to track the progress as the season goes along. Actual sales can be compared to planned sales, actual receipts to planned receipts, actual ending inventories to planned ending inventories, future open purchase order quantities to planned receipts for each month.

Like any good budget, an Open-To-Buy needs to have a future orientation. It needs to be able to tell management how much inventory is needed in any future month to make the sales and ending inventory plans, given the current purchase order commitments for that month.

The open-to-buy through any given month is the planned ending inventory less the projected actual ending inventory. For prior months it quantifies whether the company was over-inventoried or under-inventoried. For future months, it identifies through any given month whether additional inventory is needed or whether too much inventory has already been committed to.

The open-to-buy within any given month is the planned receipts for that month less the current purchase commitments. For prior months it measures the efficiency of the buyers and vendors in providing inventory as planned. For future months, especially for future seasons, it quantifies any remaining available open-to-buy for that specific month.

Like any management tool, an Open-To-Buy is merely a tool to help a small retailer better manage their inventory. It requires an initial investment in time and attention to build out a realistic plan, and diligence to maintain it as you go through the year or a season. But it can yield dramatic results quickly in most situations, from increased sales to leaner inventories and reduced markdowns and overstocks. It's a tool that in the hands of a fully committed small retailer can profoundly improve financial performance.