Why Micro Fulfillment Centers Are Here to Stay

The Covid-19 pandemic has caused a rapid rise in e-Commerce order volumes. Consumers’ expectations for fast deliveries put pressure on omnichannel retailers to adopt new approaches to fulfilment. Consequently, the implementation of omnichannel fulfilment strategies has accelerated considerably. One of the formats being adopted is Micro Fulfillment centers (MFCs) – Is this model gaining the upper hand in a post-pandemic world’s supply chain?

In a survey by the National Retail Federation, 42% of US retailers cited faster fulfilment of online orders as their top priority. To meet these demands, retailers must focus on the cost and speed of order fulfilment. This necessitates the optimization of the overall cost across the network and finding more efficient ways to prepare online orders. Estimates indicate that same-day shipping is three times more expensive than next day options, while customers expect faster levels of service such as two-day, next-day, or two-hour shipping.

To overcome these challenges, companies are testing different fulfilment models and we are observing an increasing demand for warehouse automation across industries. MFCs augment pick-from-store volumes, thus helping retailers to meet fast-delivery expectations.

The benefits of MFC

MFCs are small, sometimes highly automated fulfillment centers that serve online orders. They are typically located in densely populated urban areas that are close to end customers. MFCs can be stand-alone, attached or in-store facilities, and vary from 2,000 to 50,000 sq. ft. in size. However, most are less than 10,000 sq. ft, as opposed to traditional fulfillment centers, which are ~300,000 sq. ft. in size

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.

Importantly, these facilities can move inventory and fulfillment close to the final consumer, allowing retailers to deliver orders in less than two hours. 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.

Buy-in from multiple retailers

MFCs can serve multiple types of retail outlets including grocery, convenience, drug, general merchandise, and department stores. Companies such as Amazon, Walmart, Target, Walgreens, Tesco, Ahold Delhaize, Nordstrom, Instacart are investing in automated MFCs to fulfil online orders.

In January 2021, Walmart announced that it will add automated MFCs to dozens of its store locations. Instacart recently announced the use of micro-fulfilment centres to fill retailers’ online grocery orders placed via the Instacart Marketplace or through a grocer’s branded Instacart e-commerce site. Walgreens announced in July 2021 their plan to introduce 11 new micro-fulfilment centres across the U.S. by the end of 2022. The retailer already has two facilities in operation in the U.S. cities of Phoenix and Dallas to support prescription fulfilment for pharmaceutical orders.

Ahold Delhaize, a food retail group, recently opened a MFC in Philadelphia that will deliver 15,000 online orders per week. The project includes a storage and retrieval system (robotic picking technology), grocery-specific syncing software, and manual picking technology developed in-house by Peapod Digital Labs. While the solution is using MFC technology, the size is bigger than the typical MFC (~120,000 sq. ft.), and more like the recent Ocado warehouses that Kroger just announced in partnership with the U.K. grocery automation company. These facilities use automation and artificial intelligence to serve online grocery orders.

Factors to consider

Since automation plays a critical role in speedier omnichannel fulfilment at the lowest cost, MFCs will continue to flourish. The MFC model will shape future decisions on the size and scale of omnichannel networks that encompass complex configurations of fulfillment nodes. In addition, MFCs are highly flexible, modular warehouse solutions that enable retailers to scale quickly.

But developing successful MFC-based fulfilment solutions is far from trivial. A key consideration is choosing agile fulfilment solutions that enable the retailer to respond quickly to shifts in demand. Location selection is another critical factor. By siting fulfilment operations close to end customers, MFCs reduce last-mile delivery costs and support faster deliveries. Also, 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. Finally, 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.

While the MFC model is an innovative online order fulfilment solution that retailers were using before the pandemic, Covid-19 accelerated demand for the model since many brands are finding better ways to use their physical stores space to meet consumer service expectations.

The MFC model is, to a large degree, the product of pandemic-related omnichannel fulfilment. However, it will have a long-lasting impact on the retail landscape.

Disclaimer: Dr. Eva Ponce has no specific knowledge of CEVA's products or services and her role as an academic prevents her from advocating for any company's products or services.