Open to Buy (OTB): A Retailer’s Guide to Smart Inventory Purchasing

Every retail buyer faces the same tension at the start of a season: order too much and cash gets locked in slow-moving stock, order too little and the shelves run empty just when demand peaks. The tool that keeps this balance in check is Open to Buy, usually shortened to OTB. It is one of the most important controlling mechanisms in merchandise planning, and once the logic clicks, the arithmetic behind it is surprisingly simple. This post breaks down what OTB is, the formula, and several worked examples in rupees, including the trickier situations where you have to calculate it mid-month or without knowing your exact stock value.

What open to buy really means 🔗

Open to Buy is a system that tells a buyer how much more merchandise can still be purchased for a given period after accounting for what is already in stock and what has already been ordered. It is essentially a purchasing budget expressed in money (or sometimes units), and it keeps actual buying aligned with the planned sales, planned reductions, and the closing stock the business wants to hold.

Think of it as the gap between what you need and what you already have lined up. The whole point is control. As industry planners describe it, OTB is a budgetary control mechanism that ensures purchasing decisions stay consistent with financial goals while still keeping enough inventory to meet demand. When this gap is managed well, the store avoids both overstocking, which ties up cash and forces markdowns, and understocking, which loses sales. A stockout is expensive: many customers will simply switch stores or skip the purchase rather than wait.

Why buyers never order their full requirement upfront 🔗

A common beginner’s instinct is to place orders for the entire seasonal requirement at the start. Experienced buyers almost never do this, and OTB is the reason they can hold back with confidence.

The first reason is uncertainty. A season may not perform the way the forecast predicted. If a buyer commits the full budget early and sales disappoint, the store is stuck with excess inventory and no room to react. Committing to orders purely on the basis of last year’s figures, without leaving room for things to go differently, is exactly how overbuying and excess markdowns happen.

The second reason is opportunity. By holding back a portion of the budget, a buyer keeps the flexibility to add new trending styles that appear mid-season, replenish fast-moving items that are selling faster than expected, take advantage of a supplier rebate or special deal, or fund an unplanned promotion. Smart retailers deliberately keep a part of the budget free as replenishment stock, opportunity stock, and a reserve buffer for when things do not go to plan. OTB is the discipline that tracks exactly how much of that flexibility remains.

The open to buy formula 🔗

At its core, the formula is a subtraction:

Open to Buy = Merchandise required − Merchandise available

Both halves of this equation are made up of specific components, so it helps to break them down.

Merchandise required 🔗

This is everything the business needs to cover during the period. It has three parts: expected sales (what you plan to sell), expected reductions (markdowns, shrinkage, discounts, and other losses in stock value), and planned end of month (EOM) stock (the closing stock you want to be holding at the end of the period). Reductions matter because markdowns and shrinkage pull stock value down just as sales do, so they have to be replaced too.

Merchandise available 🔗

This is everything you can already count on. It has two parts: stock on hand, which is your beginning of month (BOM) stock, plus merchandise on order, meaning goods already ordered or in transit but not yet received. One useful detail to remember is that goods which have been sold but not yet delivered are not counted as available stock.

The calculation can be done at retail value or at cost value, and it can also be done in units. Most merchandise teams run it primarily in retail value because that keeps buying directly in sync with sales targets, while cost value is used for cash and finance planning. We will look at both views below.

A step by step OTB calculation 🔗

Let us put real numbers to the formula. Suppose a buyer is planning for a month with the following figures:

Beginning of month (BOM) stock is ₹3,00,000. Planned sales for the month are ₹2,00,000. Planned reductions are ₹25,000. Planned end of month (EOM) stock is ₹4,50,000. Goods already on order are ₹1,50,000. All figures here are at retail value.

Step 1 – Merchandise required. Add planned sales, planned reductions, and planned EOM stock:

₹2,00,000 + ₹25,000 + ₹4,50,000 = ₹6,75,000

Step 2 – Merchandise available. Add BOM stock and goods on order:

₹3,00,000 + ₹1,50,000 = ₹4,50,000

Step 3 – Open to Buy. Subtract available from required:

₹6,75,000 − ₹4,50,000 = ₹2,25,000

This tells the buyer that ₹2,25,000 worth of additional merchandise, at retail value, can still be ordered for the month. Anything beyond this would push the business past its planned closing stock and lock up extra cash. This is the same logic captured in the widely used version of the formula, where OTB equals planned sales plus planned markdowns plus planned end-of-month inventory, minus beginning-of-month inventory (with on-order goods netted out).

Converting OTB from retail value to cost value 🔗

The retail figure tells a buyer how much to order in terms of selling price. But to plan cash flow and investment, the business needs to know how much money will actually leave its bank account, which is the cost value. The bridge between the two is the initial markup percentage.

Initial markup is the difference between the cost and the initial retail price, expressed as a percentage of the retail price. The formula is initial markup % = (retail price − cost) ÷ retail price. So if a product has a 40% markup, the cost is 60% of its retail price.

To convert a cost figure into retail, divide by one minus the markup:

Retail = Cost ÷ (1 − markup)

For example, an order costing ₹1,50,000 at a 40% markup has a retail value of ₹1,50,000 ÷ (1 − 0.40) = ₹1,50,000 ÷ 0.60 = ₹2,50,000.

To go the other way and convert OTB at retail into OTB at cost, multiply by one minus the markup:

OTB at cost = OTB at retail × (1 − markup)

Using our earlier OTB of ₹2,25,000 at retail with the same 40% markup: ₹2,25,000 × 0.60 = ₹1,35,000. So while the buyer is open to buy ₹2,25,000 worth of goods at selling price, the actual cash investment needed is ₹1,35,000. The distinction between markup based on retail versus on cost trips up a lot of people, so it is worth keeping the convention consistent throughout a plan.

Calculating OTB in the middle of a period 🔗

OTB is not a one-time, start-of-month exercise. Partway through the period, actual sales and reductions are known, and the buyer needs to recalculate how much room is left for the remaining days. This is sometimes called the OTB for the balance period.

The method adjusts the plan for what has already happened:

Balance sales = planned sales − actual sales to date. Balance reductions = planned reductions − actual reductions to date.

Then the merchandise required for the balance period is balance sales + balance reductions + planned EOM stock. Subtract the merchandise available (current stock on hand + goods still on order) to get the OTB for the rest of the period.

Here is a quick example. Planned sales were ₹2,00,000 but ₹80,000 has already been sold, so balance sales are ₹1,20,000. Planned reductions were ₹25,000 and ₹10,000 has been taken, so balance reductions are ₹15,000. Planned EOM stock stays at ₹4,50,000. Merchandise required for the balance period is ₹1,20,000 + ₹15,000 + ₹4,50,000 = ₹5,85,000. If stock on hand is now ₹2,50,000 and goods on order are ₹1,50,000, merchandise available is ₹4,00,000. The balance OTB is ₹5,85,000 − ₹4,00,000 = ₹1,85,000. This in-season recalculation is what separates teams that genuinely use OTB from those that treat it as a formality, since the gap between plan and reality only shows up when you update the budget against real data as it comes in.

Finding OTB when the stock value is not known 🔗

Sometimes a buyer needs to calculate OTB on a particular date but does not have a real-time stock figure handy. This happens often when physical stock counts are infrequent. The stock value can be reconstructed from records.

The logic follows how stock actually moves. Start with the opening stock, add everything that came in, and remove everything that went out:

Stock on hand = Opening stock + Purchases made till date − Actual sales − Actual reductions

For example, if the opening stock was ₹3,00,000, purchases received till date were ₹1,30,000, actual sales were ₹80,000, and actual reductions were ₹10,000, then the stock on hand is ₹3,00,000 + ₹1,30,000 − ₹80,000 − ₹10,000 = ₹3,40,000.

Add any merchandise still on order to this reconstructed stock to get merchandise available. From there, the calculation is exactly the same as the mid-period method above: work out balance sales and balance reductions, add planned EOM stock to find merchandise required, and subtract merchandise available to arrive at OTB. This approach means a buyer is never blocked from making a sound purchasing decision just because the latest stock figure is not on the screen.

One closing point worth remembering: OTB is never perfectly accurate, because it depends on a forecast. In practice, a deviation of around 5% from plan is considered a good result, which is precisely why buyers keep that buffer rather than committing every rupee on day one.

What do you think? If a season starts selling far faster than planned, should a buyer use the freed-up OTB to chase more of the same fast-movers, or hold it back for new styles that might appear later? And in a market with long supplier lead times, how early would you commit your OTB before the flexibility it protects starts to disappear?

References

1. https://www.relexsolutions.com/resources/open-to-buy/
2. https://www.shopify.com/blog/open-to-buy-plans
3. https://gulfnews.com/business/retail/the-fine-art-of-ordering-and-retaining-stock-1.1417604
4. https://www.toolio.com/post/open-to-buy-planning-what-is-otb-for-retail
5. https://lgrmag.com/article/open-to-buy-inventory-management-key-for-retailers/
6. https://360retailmanagement.com/how-to-calculate-and-adjust-initial-markup-for-seasonal-sales/
7. https://study.com/academy/lesson/initial-maintained-retail-markup-definition-calculation.html
8. https://retalon.com/blog/open-to-buy
9. https://www.retaildogma.com/otb-retail/