Open-to-Buy (OTB): Formula, Worked Example, and the Execution Gap

Open-to-buy (OTB) is the dollar or unit budget available to purchase new inventory in a given period. It answers one question: given your sales plan, your current stock, and the merchandise already on order, how much room is left to buy? OTB is a top-down constraint — it keeps a retailer from committing to more inventory than their sales plan can absorb — and is the standard period-level planning tool in retail merchandise management. It is a planning input, not an execution layer. A closed-loop procurement system — where every step of the buying workflow, from order through supplier reply through receiving and inventory update, runs automatically without anyone retyping anything between steps — is what converts that budget into purchase orders that actually ship.

Quick answers

What is open-to-buy? Open-to-buy is the merchandise budget remaining for a period. Calculated as planned sales and markdowns, plus the inventory you want on hand at the end of the period, minus the inventory you're starting with, minus what is already on order. A positive OTB means buying capacity remains. A negative OTB means the period is already over-purchased relative to plan — a signal to delay receipts, reduce outstanding orders, or revise the sales plan upward.

What is the open-to-buy formula?

OTB = Planned Sales + Planned Markdowns + Planned EOM Stock − BOM Stock − On Order

Dollar OTB uses cost or retail value consistently throughout. Unit OTB uses quantities.

Is OTB expressed in dollars or units? Almost always in dollars, because OTB is fundamentally a buying budget that connects directly to cash constraints and accounting. Dollar OTB works across every price point in a mixed assortment. Unit OTB is occasionally useful within a narrow category — planning coffee orders in cases, or a single apparel style by count — but dollar OTB is the retail industry standard.

How often should I recalculate OTB? Monthly, at minimum. Weekly is better for fast-moving categories. Recalculate whenever a significant shipment arrives, a sales forecast is revised, or an outstanding order is canceled. OTB is only accurate when BOM Stock and On Order reflect reality — which means both require a procurement system that tracks live inventory and outstanding purchase orders.

How is OTB different from a reorder point? OTB is a period-level buying budget that constrains total category spending. A reorder point is a per-SKU trigger — it fires when a specific item drops below a threshold. OTB is top-down (a budget that flows into category decisions); reorder points are bottom-up (individual item signals). A complete planning system uses both: OTB to set the total purchasing envelope, reorder points to identify which items fill it.

How is OTB different from EOQ? Economic order quantity answers "how much of a single SKU is optimal to order at once?" OTB answers "how much can the business afford to buy across all SKUs this period?" They operate at different levels of abstraction: EOQ is per-item per-order; OTB is per-period across the full assortment.

The formula

OTB = Planned Sales + Planned Markdowns + Planned EOM Stock − BOM Stock − On Order

Planned Sales: The expected retail or cost value of merchandise to be sold during the period. For a retailer with at least 12 months of POS history, planned sales are typically derived from prior-year actuals with a trend adjustment. A retailer who sold $22,000 in April last year and is trending at +6% year over year projects $23,320 in planned April sales. New businesses without POS history use category benchmarks and actual-to-date actuals once the month is underway.

Planned Markdowns: The retail value of price reductions planned for the period — clearance events, promotional discounts, end-of-season markdown calendars. Markdowns are included because marked-down inventory exits at the reduced value, not the original retail. Omitting markdowns understates how much inventory will clear the floor, which overstates available OTB. A retailer running a two-week clearance on slow-moving items needs to estimate that markdown impact and include it.

Planned EOM Stock (End-of-Month): The inventory value you want on hand at the end of the period. Usually derived from a stock-to-sales ratio (STS) target: if April planned sales are $22,000 and the target STS entering May is 2.8×, planned EOM stock is $61,600. The ratio represents the inventory buffer needed to support next month's sales given lead times and demand variability. Setting EOM Stock too low risks stockouts entering the next month; setting it too high ties up working capital unnecessarily.

BOM Stock (Beginning-of-Month): Actual on-hand inventory at the start of the period, valued consistently with the rest of the calculation. This is a known quantity, not an estimate, pulled from the inventory system. In a closed-loop platform it is the live on-hand balance from the most recent inventory state. In a manual setup it is a spreadsheet figure that may already be stale by the time the OTB calculation runs.

On Order: Merchandise that has been ordered but not yet received. The most commonly omitted component in manual OTB calculations. If three purchase orders are outstanding from the past two weeks, totaling $7,200 of merchandise scheduled to arrive this month, those $7,200 must reduce OTB now. Forgetting On Order overstates buying capacity, leading to over-purchasing and end-of-month inventory above plan.

The sum of Planned Sales and Planned Markdowns is often called planned reductions — everything expected to leave the floor during the period, whether sold at full price or marked down. Planned EOM adds the inventory cushion needed at period end. Subtracting BOM Stock and On Order gives the net buying need: the OTB.

Worked example

A specialty gift shop is planning April. All values at retail:

OTB = $22,000 + $2,800 + $61,600 − $54,500 − $7,200 = $24,700

The buyer has $24,700 of buying capacity for April delivery. If a vendor presents a $30,000 assortment, the buyer can take $24,700 of it — or she needs to cancel an outstanding order to free OTB, revise the sales plan upward if the assortment is genuinely stronger than last year, or push some receipts into May.

Converting to cost at a 52% initial markup:

OTB at cost = $24,700 × (1 − 0.52) = $11,856

Most retail buyers work in retail dollars to stay aligned with the pricing system, then convert to cost when issuing actual purchase orders.

Stock-to-sales ratio and EOM targets

The stock-to-sales (STS) ratio is the ratio of beginning-of-period inventory to that period's planned sales:

STS ratio = BOM Stock ÷ Planned Sales

A retailer starting April with $54,500 of inventory and planning $22,000 in sales has a 2.48× STS ratio. Whether that is appropriate depends on category, lead time, and demand variability.

Typical STS ratio ranges by category (retail value):

The underlying principle: a higher STS means more selection and lower stockout risk, at the cost of more frozen working capital. A lower STS means faster turns and less capital tied up, at the risk of stockouts on popular items. The right STS target is related to safety stock sizing — businesses with higher demand variability or longer lead times need more inventory buffer, which translates to a higher STS.

OTB vs. reorder point vs. PAR level

Three tools, three levels of abstraction:

OTB sets the outer constraint. Reorder points and PAR levels operate inside that constraint, at the item level, deciding which specific items are ordered and in what quantity within the period budget.

A retailer with $24,700 of OTB available still needs to determine which of her 280 SKUs need replenishment and by how much. That is the job of item-level replenishment logic — demand-pattern classification, days of inventory on hand tracking, and statistical reorder triggers. OTB tells you the envelope; reorder points and PAR levels decide what goes inside it.

When OTB planning goes wrong

OTB planning is widely practiced; accurate OTB planning is less common. Three failure modes dominate.

1. On Order is underreported. The most reliable way to overstate OTB is to forget about outstanding purchase orders. In a manual setup, purchase orders live in email threads, supplier portals, and buyer memory. A buyer who placed four orders last week and has not logged all of them will calculate more available budget than exists, over-buy for the period, and finish the month with inventory above plan and cash below.

2. BOM Stock is stale. OTB requires accurate beginning-of-month inventory. In a system where receiving events are recorded manually — or reconciled only at month-end close — BOM Stock is already wrong by the time the OTB calculation runs. A retailer carrying 40 phantom units of a SKU that sold out two weeks ago has an overstated BOM, which understates OTB and creates artificial buying constraints on items the store actually needs.

3. OTB does not connect to item-level orders. Even a perfectly calculated OTB budget requires a second step: deciding which items to order and actually placing those orders. Most OTB tools — spreadsheets, standalone planning software — stop at the dollar budget. The buyer must then open separate systems (email, vendor portals, an EDI tool, another spreadsheet) to convert the budget into purchase orders and send them to suppliers. This is the OTB execution gap: planning that does not complete itself as a purchase order.

Closing the OTB loop

The structural solution to the OTB execution gap is a closed-loop procurement system — one where the period budget, the item-level replenishment signals, the purchase orders, the supplier replies, and the receiving events all live in the same workflow and update each other automatically.

In that setup:

• On Order is always accurate because every PO is tracked in the system from send to receipt. The moment a supplier confirms, an ETA slips, or a partial shipment arrives, On Order updates and OTB recalculates.
• BOM Stock is always accurate because every receiving event updates inventory in real time. The number that enters next month's OTB formula is the system's live on-hand, not a manually transcribed count.
• Item-level replenishment runs inside the budget. Inventory alerts surface the specific SKUs that have crossed their reorder threshold, ranked by revenue at risk and restocking cost, within the OTB envelope the period allows.
• POs go directly to suppliers through email, WhatsApp, EDI, or portal — without re-entering the order into a separate send system.
• Supplier replies update the order automatically. Price changes, substitutions, short shipments, and ETAs are parsed and applied, keeping On Order current without manual re-typing.
• Receipt closes the loop. One receiving click updates inventory, closes the cash commitment, and prepares the accurate BOM Stock for the next OTB calculation.

See Procurement Capital Forecasting for how to extend OTB planning into a 10-month rolling buying budget — including the cash timing versus COGS timing separation that standard OTB math does not address.

Start your free 90-day trial at linenow.co to run OTB planning and procurement execution in the same system.

Related

• PAR Level — the target order-up-to quantity; the item-level counterpart to OTB's category budget
• Reorder Point — the item-level trigger that populates the OTB budget with actual orders
• Safety Stock — the statistical buffer that feeds into both PAR levels and OTB stock-to-sales ratios
• Days of Inventory on Hand — urgency signal for prioritizing which items fill the OTB budget first
• Economic Order Quantity — per-item order sizing; the item-level complement to OTB's period-level budget
• Procurement Capital Forecasting — the 10-month buying plan that extends OTB across the full buying season
• Procurement for Specialty Retailers — the complete replenishment and buying workflow for SMB retail