With labor expenses increasing, small parcel shipping becoming more expensive and carriers struggling to support the volumes, companies are implementing new strategies with Micro Fulfillment Centers (MFC).
Micro Fulfillment Centers are smaller footprint facilities; relying less on manual labor and more on automation which makes them scalable to peak volumes. Generally, these facilities are located in cities to be closer to the customer. The automation and closeness to the customer reduces order turnaround and delivery time to same day (or a couple hours) and reduces small parcel delivery costs.
What Are Micro Fulfillment Centers (MFC)?
For a segment of multichannel retailers and ecommerce, the concept of Micro Fulfillment Centers is not new. MFC’s are not for every company, but it’s worth assessing how this concept might fit into your fulfillment network strategy.
Traditional ecommerce fulfillment of consumer orders is handled by one or two facilities servicing the USA, as well as international orders. Major retailers may have multiple distribution centers located across the country. To minimize freight and time in transit, companies work with carriers to implement zone skipping or other strategies. These large facilities typically have to ramp up with seasonal workers to handle peak volumes. The holiday peak weeks maybe 10 times higher or more than average week. During a holiday peak a center may add hundreds of employees.
Micro Fulfillment Centers, on the other hand, are typically supported in a variety of footprints such as through the backrooms of larger retail footprints, or smaller warehouse locations. These centers are replenished from larger distribution centers within the distribution network.
A number of forces are driving Micro Fulfillment Center deployment. Ecommerce sales have been growing at a faster rate than brick and mortar stores for a number of years. COVID has accelerated the ecommerce shift. As an example, Walmart US ecommerce sales in the 4th quarter 2020 increased 69% with strong results across all channels.
From a real estate perspective, retail consultancy, Coresight Research, estimated that 15,000 stores are permanently closed in 2020 versus 9,548 in 2019. This has left many cities with shuttered store fronts and rock bottom lease costs on many different sized properties. This represents a tremendous opportunity for ecommerce and local fulfillment based in most major cities.
With COVID, many retailers ramped up order on-line - ship from store or DC and on-line with contactless curbside pick-up. Retail experts and shopping center developers do not see these major shifts returning what brick and mortar retail was.
And then the Amazon threat is stronger every day. They continue to invest tens of billions in logistics and fulfillment including Prime Jet fleet, Prime truck fleet and local delivery services.
With Amazon Prime Now, you can get tens of thousands of daily essentials and groceries delivered in 1 to 2 hours when you order online, or in the Prime Now app. According to industry forecasts, the number of Amazon Prime members in the United States is projected to reach more than 153 million users in 2022, up from 142.5 million in 2020.
In summer 2019, Amazon started telling the press, it was opening what they call “mini-fulfillment centers” close to cities which they say are “one-tenth the size” of their typical centers. Amazon’s “one-tenth” size would be large in square footage for companies in a $50 to $75 million sales range.
All of these factors favor the Micro Fulfillment Center strategy for ecommerce.
What Business Segments Might Benefit
Much of the early MFC adoption has been grocery chains. However, multichannel retailers and wholesalers with a wide range of product types are able to benefit from Micro Fulfillment Centers. Macy’s has been experimenting with dark stores in Delaware and Colorado as MFC. Dark stores are stores dedicated to supporting the roles of an MFC, but have no retail foot traffic.
Adidas says that direct to customer is planned to be 50% of its sales in 2025 (up from 40% in 2020) and they are paring down wholesale partners. The company plans “to deepen its digital ecosystem.” The company currently has 150 million members, and wants to triple that, to 500 million by 2025. It follows that a high percentage of their sales come from the most populous areas. With this type of growth, and others manufacturers need infrastructure to support customer demand. Long term, we may see someone like Adidas shift to MFCs – especially to support peak times.
Certain business-to-business ecommerce companies can benefit from the MFC concept rather than delivering from several large facilities and having longer in transit times. Other segments such as electrical, plumbing and industrial supply companies have been migrating in this direction as well. This allows distributors of parts and suppliers to be more responsive to customer needs.
While Micro Fulfillment Centers aren’t for every retailer, ecommerce or wholesaler, there are numerous benefits to both the seller and the end consumer. These include:
- The ability to order online, pickup locally the same day. This can allow many online retailers to compete with traditional brick and mortar retailers. Trends were already pushing buy online and pickup in store before the pandemic.
- Provide same day local delivery options and lower costs to customers. Customer convenience and near instant gratification are also driving retailers to offer local delivery options within a certain radius. The cost to deliver locally, within a 40-60 mile radius, is more economical than national small parcel carriers which are still at least a one day time in transit from larger fulfillment centers outside the market.
- Retailers have to assess their total spend and accessorial charges and changes in package characteristics and volumes etc. to understand the net impact on freight. Micro Fulfillment Centers will also begin to have an impact on small parcel carriers, as it has an impact on overall profitability of a shipper account.
- Automation reduces labor costs and staffing challenges. Smaller Micro Fulfillment Centers and automation allows more scalability reducing the dramatic peak season labor ramp when operating a one or two fulfillment network. In highly competitive markets, it can be difficult to hire the additional workers, especially when relying on staffing agencies with high turnover. In addition, by using automation, the onboarding and training costs can be much lower.
- Lower facility costs than traditional fulfillment. The ecommerce boom, larger fulfillment centers are in short supply. With Micro Fulfillment Centers can utilize a wide variety of facility and space, especially those with lower clear heights etc. With the downturn in some larger brick and mortar retail, larger footprint retail locations are available at decreased lease rates in cities.
Micro Fulfillment Centers are supported through a variety of facility types. The characteristics are wide ranging from using the back rooms of existing brick and mortar stores, to “dark stores” or small distribution sites. The footprints are dictated by the SKU assortment strategy, level of automation and potential order volumes. Typically, the facilities are supported in the following ways:
Retail Back Rooms
Existing retailers can leverage the backrooms of existing retail locations. For smaller retailers, this can be challenging as there is little to no backroom now. For larger store footprints, this can be a bit easier. The trend for some large, big box retailers is to scale back the existing retail floor, offering additional space to support ecommerce fulfillment functions. However, retailers must be careful to not disrupt the customers retail experience by having order pickers on the floor.
Dark stores are retail locations used for fulfillment purposes with no retail foot traffic permitted within the fulfillment footprint. There may be pickup areas for order online- pickup at store off the fulfillment floor. These facilities support local and extended delivery.
Small Distribution Footprints
MFCs can fit into a wide variety of smaller footprints converted to distribution in major metro areas. For many companies, these are facilities that can be as small as a few thousand square feet, to possibly 10,000+ square feet. This allows for more flexibility in finding the right location in your desired market.
Automation is Key
Regardless of the building type, MFC facilities tend to be highly automated so as to fulfill a high volume of orders with relatively few employees. The $15.00 per hour is not an “if” but a “when”. Walmart and Target are already hiring at $15 or higher. Learn more about what how automation is reducing labor costs and improving order turnaround time.
There are a wide variety of automation technologies that are implemented to support the MFC. These types of facilities are engineered to minimize manual labor; reduced picking travel distance and time; service to the customer in one to-two-hour cycle times for local pickup and local delivery; as well as scalability to service the peak surges.
Most of these are “goods to person” automation technologies including:
- Shuttle type systems selecting totes out of storage and bringing them to a pick station.
- Autonomous Mobile Robots (AMR) with the ability to move pallets, or shelving units to a pick station.
- Vertical Lift Modules (VLM) which deliver trays from high density storage to a picking port.
- Batch picking with pick to light from traditional storage.
- Put walls for performing unit and order level sortation.
- Packing and shipping automation such as putwalls, automated carton sealing and print and apply for shipping labels.
Micro Fulfillment Center strategies to deliver customer orders same day (or within hours) and at lower costs will rapidly change retail, wholesale and ecommerce order fulfillment. Micro Fulfillment is not for every company but it’s worth evaluating to see how it can be leveraged.