How Micro-fulfillment Centers Are Changing the Face of Retail
The COVID-19 pandemic has influenced business dynamics in a plethora of ways—and the surge in micro-fulfillment centers (MFCs) is yet another item that can be added to the list.
Over the past several years, the growing demand by digitally-focused consumers for two-day, next-day, and same-day delivery has required retailers to come up with more time- and cost-efficient ways to meet their evolving needs.
Plus, there’s that fickle supply chain that has disrupted inventory stability and often left retailers wringing their hands as customers waited for their goods.
Increasingly, the small-but-mighty MFC is one solution retailers are turning to as they seek to bridge the gap between increasing consumer demand and their ability to meet it.
This quick explainer video from Honeywell provides an overview.
Rapid Growth Driven by Same-Day Demand
Based on its recent research, Interact Analysis predicts that “just under 7,300 automated micro-fulfillment centers (MFCs) will be installed by the end of 2030, up from just 86 at the end of 2021.”
MFC definitions vary, but in an overview of the report, the firm lists three types of MFCs:
Rapid delivery dark-stores: “Facilities used by rapid delivery companies to fulfil online orders in less than 2 hours. Rapid delivery companies are defined as pure-play e-commerce retailers which deliver goods in less than 2 hours.”
Automated stand-alone MFCs: “Facilities which are less than 50k sq ft in size which house warehouse automation technology.”
Automated retail-based MFCs: “Stores which have been augmented with warehouse automation technologies such as mobile robots or automated storage systems.”
Attributing the rapid pace of growth in the short term to the demand for same-day grocery delivery, Interact Analysis says that “In the near future, much of the growth in the automated MFC market will come from the large incumbent grocery retailers, such as Walmart and Tesco, as they strive to offer same-day delivery services.”
Since non-grocery retailers don’t have the same demand for same-day delivery, the uptake in that segment has been slower, according to a press release.
“Additionally, the rapid-delivery companies have so far been slow in deploying automated MFCs,” the release notes. “That’s because they’ve been focusing more on network expansion and customer acquisition rather than driving operational efficiency through automation. However, the rapid delivery market will likely undergo a period of consolidation in the coming years which will lead to a strong focus on profitability per delivery site – and investment in automation.”
Quoted in the announcement, Rueben Scriven, Senior Analyst at Interact Analysis, said, “There’s no doubt that the growth in the automated MFC market has been slower than expected. This is partly driven by supply-chain constraints and permitting delays, although Instacart’s white-label services are also calling into question the need for in-house fulfillment assets for some grocers. However, while incumbent grocers have been slower to adopt automated MFCs, the phenomenal growth of rapid delivery companies and the Q-commerce market has significantly increased the addressable market, driving future growth.”
Unique Design and Location Lead to Better Results
As CB Insights notes, the smaller footprint of MFCs offers more flexibility when it comes to location. Unlike large distribution centers that require a lot of real estate to set up shop, MFCs are compact enough to be placed closer to consumers—which is a particular benefit in urban areas.
Additionally, the research firm says when advanced technologies are in use, they can help boost efficiency. Such technologies typically include robots to retrieve items for packaging by human workers and artificial intelligence (AI) to help optimize operations.
CB Insights says these capabilities can lead to significant results, including:
Lower overhead costs: “Micro-fulfillment is estimated to reduce costs associated with an order by 75% when compared with manual picking of the order, according to an analysis by financial services company Jefferies.”
Enhanced agility: “MFCs can cost around just a few million dollars to build and can be set up in a few months.”
Faster last-mile delivery: “As MFCs are located in urban centers, they can be used to deliver orders to customers faster compared to traditional warehouses, which are often located on the outskirts of cities.”
An Alternative to Legacy Networks
Referring to an MFC strategy as “the alternative to a legacy network of large regional distribution centers,” City National Bank (CNB) describes the dynamics involved: “In the past, retailers stockpiled inventory and replenished store shelves by the pallet load. As e-commerce has grown, many companies have bolted on e-commerce and buy-in-store fulfillment in the same location.
However, the cost for one-or-two day shipping several states away can be substantial. The micro fulfillment center shortens the last mile by relocating top-selling inventory closer to the customer, so shipping individual parcels costs less.”
CNB also notes that MFCs can be a benefit to small-to-medium sized e-commerce companies because they can better support “specialized” orders: “They can offer customized services to handle products that don't ship in standard-sized cartons, such as garments on hangers, fitness equipment, health and beauty items or other products with specialized packaging.”
When it comes to the use of AI, CNB underscores the value of using data about purchasing behavior to inform predictive intelligence and help retailers decide what to order when. In this way, inventory levels can be maintained for the most popular items so customer orders can be filled quickly and consistently.
Traffic Congestion and Air Emissions Reduced
In addition to the other benefits cited, a recent report by Accenture with Frontier Economics, “The Sustainable Last Mile: Faster. Greener. Cheaper.,” found that the use of MFCs can also help to reduce traffic congestion and “harmful” emissions.
In a post for Supply & Demand Chain Executive (SDC), Accenture’s Mackenna Moralez describes the study results: “According to the study, increasing the use of micro fulfillment centers to enable same-day or next-day deliveries allows retailers and logistics operations a series of operational benefits while creating a significant positive environmental impact.”
Quoted in the article, André Pharand, a managing director at Accenture who leads the company’s postal and parcel practice, offered a prediction about the power of MFCs for those who want to stand out in the retail space.
“The carbon footprint of the last mile has long been an environmental and societal challenge,” Pharand said. “It’s time to take action and make the last mile supply chain more efficient, less expensive, and more sustainable. Organizations with innovative local fulfilment strategies and that lead in digital adoption and sustainable business practices will become tomorrow’s industry leaders.”
Factors to Consider
In a CEVA Logistics post, Dr. Eva Ponce, Director of the MIT Omnichannel Distribution Strategies Lab at the MIT Center for Transportation & Logistics, as Research Scientist, also cites the benefits of MFCs, underscoring the efficiency of this fulfillment model.
"In a typical MFC, inventory is separated from the store’s inventory, and about 5,000 orders per day are prepared, which equates to the handling of around 10,000 fast-moving SKUs,” she writes.
Emphasizing the importance of enabling delivery times in less than two hours, Ponce also highlights the potential for lower operating costs.
“MFC operating cost is low compared to other fulfilment models in omnichannel (e.g., fulfilment from the store or the backroom of the store not using this level of automation), and building a facility only requires a medium level of investment compared to the outlay required for highly automated, central fulfillment centers,” she says.
She also notes the broad applications for MFCs, which can serve retailers that include “grocery, convenience, drug, general merchandise, and department stores.”
Referring to the development of a successful MFC model as “far from trivial,” Ponce says there are several factors to consider, including:
Agile fulfillment solutions: “A key consideration is choosing agile fulfilment solutions that enable the retailer to respond quickly to shifts in demand.”
Location selection: “Location selection is another critical factor. By siting fulfilment operations close to end customers, MFCs reduce last-mile delivery costs and support faster deliveries.”
Accurate forecasting: “…the efficiency of a MFC solution is largely dependent on the retailer’s ability to accurately forecast demand; rapid order fulfilment requires the right inventory to be on hand.”
Cost evaluations: “…since these solutions involve a high level of automation, retailers need to be diligent when evaluating the cost of the supporting technology including software, as well as associated labour costs and the cost of moving inventory from distribution or central fulfillment centers to the MFCs.”
In this video from SupplyChainBrain, Jack Peck, president of FastFetch Corp., “offers a look at the value and growing use of micro-fulfillment centers by retailers.”