Most retailers hold stock using the same flat logic across the entirety of their range: sales velocity, supplier lead times, and a set weeks cover.
This is a good place to start, but quality inventory analysis is contextual. The factors that should drive stock cover decisions vary by product, by category, and by importance to the business…
A fashion retailer is more concerned with markdown risk and being left with stock in sizes nobody wants. A grocery business is watching waste and short shelf life. A manufacturer supplying B2B is thinking about order patterns and criticality of contractual service obligations. There is no single policy that serves all of these well, and the businesses that treat inventory as a single problem tend to carry the costs of that assumption quietly in their P&L.
For many retailers, one of the most overlooked contextual factors is sitting in plain sight on the warehouse floor: its physical size.
One policy does not fit all
Let’s take as our example the range of products offered by a kitchen appliance retailer…
A large fridge freezer occupies roughly 60 times the warehouse footprint of a kettle. Yet with a flat inventory cover the fridge is quietly consuming warehouse space at a rate that bears no relation to what it returns per cubic metre of storage.
Products have different profiles. Kettles carry a high percentage margin, often 30-50%, and sell in high volume with minimal price comparison. Fridge freezers carry a lower percentage margin, typically 15-25%, but generate more cash profit per unit. In terms of headline margin, the fridge looks like the prize asset.
Viewed through a different lens, the picture changes. Gross margin per cubic metre (GM/m³) measures what each product actually returns relative to the warehouse space it occupies. A kettle, compact and fast-moving, generates a high GM/m³. A large fridge freezer, bulky and slower to turn, generates a fraction of that figure per cubic metre. The cash margin per unit doesn’t offset the physical cost of holding it at high availability.
This matters because warehouse space is costly and finite. Every cubic metre committed to a slow-turning, space-heavy product is a cubic metre unavailable to something more productive. And when that slow-turning product is being held at a very high service level, the cost compounds.
Where the misalignment comes from
Stock teams are not doing anything wrong. They are optimising for the KPIs they are measured on: availability, service levels, OTIF. A 98% service level target on fridge freezers looks like great performance by those measures.
Finance and commercial teams, meanwhile, tend to focus on margin per unit or margin per category. Neither perspective naturally surfaces the question of what a product costs to hold relative to its physical footprint.
GM/m³ sits at the intersection of both views. Much like a cost-to-serve, it is in essence a commercial metric with a direct operational implication. Used as part of an inventory policy, it gives stock teams and finance teams a shared frame for asking: are we allocating our warehouse space in line with what each product actually returns?
Identifying the worst offenders
In practice, a GM/m³ analysis tends to surface a small number of products causing a disproportionate problem. Across a typical electricals or homeware range, a handful of bulky, lower-margin lines held at high service levels will account for a significant share of misallocated warehouse capacity.
The question is not just which products have a low GM/m³, but which of those products are also being held at a service level that isn’t justified by their commercial contribution. A large fridge freezer held at 98% availability is a very different proposition to one held at 92%. The customer purchasing a large appliance is typically researching, comparing prices, and often ordering for delivery rather than expecting immediate despatch. The commercial cost of a marginal reduction in service level is lower than stock policy often implies.
This is where the analysis becomes actionable. For products with a low GM/m³ and a high service level, the business has a genuine choice: reduce stock cover, lower the service level target, or accept the cost of holding that space with clear commercial justification.
One lens among many
The GM/m³ lens is most relevant where there is meaningful size variance across a product range. Electricals, homeware, garden furniture, flat-pack: categories where the physical difference between a large and small product is significant enough to materially affect the economics of holding it.
It’s a useful filter, not a complete inventory policy. Determining the right stock cover for any product requires looking at demand volatility, supplier lead times, substitutability, seasonal patterns, and a range of other factors that vary by product and category.
What a GM/m³ audit does is identify where to look first. It quickly surfaces the products where current policy is hardest to justify on commercial grounds, and points toward the adjustments most likely to free up capacity and improve the return on warehouse space.
A thorough inventory analysis goes considerably further. Across a typical electricals or homeware estate, the combined opportunity from rebalancing stock cover, adjusting service levels, and addressing range-driven inefficiencies is often larger than businesses expect.
If you’d like to understand what that looks like for your product range, get in touch with the team today.
About the author
Ashleigh’s work focuses on the performance of data analysis and production of statistical models to derive insights.
Ash has worked with start-ups, defence contractors, retailers and the NHS to derive value from data and solve big problems.