Deploying automated micro-fulfillment centers (MFCs) as a strategy to help retailers more efficiently and cost-effectively meet their customers’ demands continues to grow. Indeed, my colleague Curt Kincaid anticipated the growth of micro-fulfillment investment in May 2020.
At the time of Curt’s post, the majority of the U.S. was still in some level of lockdown, and retailers who historically stocked brick-and-mortar stores suddenly had to shift to a primarily direct-to-consumer order fulfillment model. While this development affected both big box and grocery retail operations, it is grocery where some of the biggest investments in micro-fulfillment are occurring.
Grocery store chains’ profit margins historically hover between 1-3%, and according to a recent survey – State of Digital Grocery: Growth at the Cost of Profitability – 86% of them say their biggest challenge is mitigating the losses associated with e-commerce. The same report found that 70% of grocery retailers report losing money on digital orders, and:
- 92% of grocery chains are unhappy with their online order picking efficiency
- 86% feel labor utilization could be improved
- 72% lack an accurate view of store inventory
To address those issues, 55% of grocery retailers plan to deploy or test MFCs over the next 24 months. Furthermore, by 2025, grocers expect 3.6% of all online orders to be filled by these facilities. With 76% of online grocery shoppers saying they prefer the convenience of not having to shop in-store, this strategy will allow grocers to reduce their own handling costs while meeting each customer’s preferred method of receipt, including buy-online-pickup-in-store (BOPIS), curbside pickup, or direct-to-door delivery.
Many mainstream grocery chains have already implemented MFC solutions. Inventory is redistributed away from a small number of centrally located, large-scale DCs and into many smaller footprint, automated facilities that are closer to their customers. Because MFCs are frequently located in densely populated areas, grocers can improve profitability by reducing their middle and last mile costs.
That said, because micro-fulfillment is so new and each grocer’s unique objectives for its application are different, there are multiple approaches to this strategy. They include:
- Dedicating space within an existing warehouse or distribution center (DC) to micro-fulfillment of digital orders (although the downside to this is that the majority of warehouses are not located in densely populated areas, meaning longer transportation times).
- Locating a micro-fulfillment warehouse in a dark store. This approach uses smaller industrial space or even low-traffic, inexpensive retail space in shopping centers and strip malls, allowing online orders to be filled in close proximity to shoppers. Orders can be picked up curbside at the dark store by the customer, delivered from the dark store to the customer’s doorstep, or routed to a grocery store for curbside or in-store pickup by the customer. This method takes advantage of central fulfillment on a local level.
Equipping the backroom of a grocery store (or an adjacent space) with a micro-fulfillment solution. Orders can be picked up in-store or curbside by customers or delivered to them. This fulfillment option is closest to the consumer, but requires the largest network of fulfillment sites or a careful selection of the highest-impact sites within the network.
Key Components of Micro-Fulfillment Success
The determination of where within a network MFCs should be deployed requires a careful analysis of a range of factors. These include inventory location in relation to the demand for it; a facility’s storage capacity; the degree of perishability of the items; the costs associated with delivery, both direct to customers or to retail stores for fulfillment; and the minimum number of potential delivery points within a small radius of the facility. With profitability in an e-grocery delivery operation being made or broken in the final mile costs, ensuring the ability to serve a sufficient number of customers in that small radius is critical in the business case analysis.
Likewise, data analysis on order history is crucial when determining which stock keeping units (SKUs) will be housed in an MFC. In a back-of-store application, the most commonly ordered items can be stored in the back while employees supplement those items with picks from the retail shelves. Both sets of picks are consolidated in a buffer zone prior to customer pick up or delivery. Conversely, micro-fulfillment from dark stores or space within an existing DC could offer only a limited number of SKUs for customers to select among (although a larger set than that would be located within the back-of-store solution); those orders could be delivered to a retail store for consolidation with other items for customer pickup or delivery or delivered directly to the customer.
Software is also a critical component of a successful micro-fulfillment strategy. It must be tied into real-time inventory management, customer-facing order portals, and order data. This ensures that only available inventory is made available for purchase. The software also analyzes orders to batch and route those with common items to the optimal MFC location; likewise, it can group outbound deliveries based on geographic proximity and expected service level agreements. For example, if one customer pays extra for delivery at a certain time, and a second customer a block away will accept a delivery at any time free of charge, the software will plot them both on the same delivery route to cut costs and fulfillment time.
Micro-Fulfillment Technology Options
In their simplest form, MFCs can be outfitted with static shelving and basic conveyor for manual picking, packing, and buffering of orders. This, however, requires a large enough footprint to achieve the desired throughput without excessive congestion that can slow staffers down.
Operations with tight footprints and needing greater cubic storage density of inventory are more likely to utilize a higher level of automation. Solutions might include autonomous mobile robots (AMRs) or goods-to-person (G2P) automated storage and retrieval systems (ASRS). Facilities in areas where labor is difficult to attract and retain may also consider automation as a means to allow their current employees to be even more efficient in filling customer orders.
Clearly, the options are virtually endless at this point in the evolution of micro-fulfillment strategies. It will be interesting to see how this trend continues to develop in the coming months as consumers continue to embrace the convenience of online shopping.
Wondering if micro-fulfillment can help your operation better serve your customers? Connect with us.
Matt Greene, Vice President of Life Cycle, email@example.com
Matt brings five years of experience in the Material Handling Industry. Matt helps lead a team dedicated to ensuring operations run smoothly for DCS’s partners through maintenance, training, 24/7 support, and life cycle projects. Before entering the Material Handling industry, Matt served eight years as a Naval Officer, filling roles for technical training and ensuring uptime of critical infrastructure on aircraft carriers, including nuclear reactors, electrical distribution systems, and auxiliary engineering equipment. Matt received his Bachelor of Science in Nuclear Engineering and his MBA from The University of Florida. Matt also has PMP and Lean Six Sigma certifications.
Outside of work, Matt enjoys carpentry, running, and open water swimming. He lives in Atlanta, Georgia, with his wife and three kids, where they are trying to raise third-generation competitive swimmers.