“What retailers and brands want is full-price sales and to save their gross margins,” said Liza Amlani, a retail merchandising expert and founder of Retail Strategy Group. Carry too much and you risk excess holding costs and markdowns that eat into profits. Carry too little and you risk lost sales opportunities and disappointed customers.

In its most basic form, inventory management as it relates to small retailers can be defined as “how retailers and brands manage their product assortment from style all the way down to size,” Amlani said. Are the right sizes available on-site and from vendors when you need them? Did you have a lot of excess inventory at the end of the season? Do you have an understanding of which of your products are most profitable and which need to be discontinued?

Inventory management means finding the sweet spot: enough stock to meet demand without incurring excessive holding costs and markdowns that eat into profits. Amlani shared best practices and tips for effective inventory management, whether you’re starting your first store or looking to expand.

1. Do your market research.

One way to avoid inventory excess is to make sure that you are in the right location in the first place. Successful inventory management happens when you match supply with customer needs. Before you sign that first lease, Amlani suggested, consider: Does your location make sense for the customer you’re looking to attract? Will your product assortment speak to customers in that area? Is it relevant for them? “Let’s say you are living in Colorado … and you want to open up an outdoor sports store. That makes sense because a lot of the consumers in most of Colorado are outdoor enthusiasts,” Amlani said. It might make less sense to open a tropical beachwear boutique there. “This is where a lot of retailers go wrong,” Amlani said. “They’ll open a store because it serves their own purpose, but really, you’re in the business for the customer. What do they want to see?” Get it wrong and you’ll be stuck with lots of extra stock — and bathing suits.

2. Vet your suppliers.

Your relationship with your vendors is one of your most important. Your inventory supply depends on them! So before entering into any agreements, ask them questions like: How much lead time is required for placing initial orders? Can you accommodate special delivery requests or schedules? How do you handle fluctuations in production needs? Will we have access to real-time inventory and order tracking information? Are you open to letting us test products before placing large orders? This last question is important, especially if you’re opening your first business. “It does not mean that a product is going to sell just because you have it,” Amlani said. Better to do a pilot and if the product moves, you agree to buy more of it.

3. Gather customer insight.

Accurate forecasting of what your customers want to see from you in the future involves hard data, including historical sales patterns, market trends and seasonality. But “it’s important to not just look at hindsight; you want to think into the future,” Amlani said. Digital, predictive analytics platforms like Aptos Retail can help determine the best stock targets. But sometimes the best information comes from talking to the customers who come into your store: What colors do they like, what sizes do they wear? “Use every tool at your disposal to understand what your customer wants,” said Amlani.

4. Save part of your budget for in-season purchases.

A lot of inventory purchases take place months and even a year in advance. “That’s so far away from when your customer is intending to shop,” Amlani said. Leave dollars open to buy into things that are selling really well or that your customer wants at the moment but you haven’t bought. “That might be a trend like a fleece because a lot of people are working from home,” Amlani said. At a minimum, she said, set aside 20% of your budget for in-season purchases.

5. Maximize space and efficiency.

When you only have a small space, what you put out on the floor matters a lot. “I talk about seasonality a lot,” Amlani said. “The normal thing to do in the retail industry is to bring in coats in July, but in July, it’s 100 degrees outside and customers are not buying coats.” These coats sit on the floor, taking up valuable space and eating away at the store’s sales per square foot. A rule of thumb in retail is that “the longer the items are in the shop, the more the customer will become bored of that product, and it will end up on markdown,” said Amlani. Consider investing in extra storage space. Some options for small businesses include shared warehouse spaces; third-party logistics providers, which often offer warehousing services); or drop shipping, in which products are shipped directly from suppliers to customers. Excess storage space enables you to move your products onto the floor when they’re more likely to sell at full price, Amlani said.

6. Invest in inventory management technology.

A lot of inventory management systems can help with order management, inventory valuation and inventory tracking, but cloud-based systems provide real-time updates accessibility from anywhere so you always know what inventory you have on hand, either in your stock room or distribution system. You can lose sales if a customer asks for a specific product or size and you don’t remember that you have it on hand. “Have everything at your fingertips,” Amlani said. “That’s definitely the future. What you want to do is remove those friction points that are going to deter your customer from shopping and actually buying from you.” Also look into new artificial intelligence-based solutions, which can manage the supply-demand equilibrium by evaluating your sales and inventory data, she said.

7. If an item isn’t selling, get creative.

Unsold inventory is a significant challenge. Amlani’s first suggested course of action: “Introduce promotions or incentives to encourage customers to buy that product” like bulk purchase discounts, flash sales or discounts. If you have available storage space, consider removing the item from the sales floor and storing it for the next year, when you might be able to sell it at a higher price point. “Think in terms of seasonality,” Amlani said.

8. Stay in sync with customers.

Inventory management is not a one-time task; it’s a continuous process. Regularly review and refine your strategies to adapt to changing market conditions and customer needs. Inventory management all goes back to how well you understand your customer, whose needs and desires fluctuate constantly. “You want to be selling inventory to customers at the right time at the right place in the right size range,” Amlani said.