The Rise of Micro Fulfillment Centers

— By Balmiki Bhattacharya —

 

Micro fulfillment centers are on the rise — and here to stay.

 

The fundamental changes in consumer behavior have caused an essential shift in how items are delivered. The rise of e-commerce has transformed supply from its physical and limited state to a virtual state — which is “always available.” According to Digital Commerce 360, 68% of online shoppers cited fast shipping capabilities as the determining factor for placing an online order. Part of the solution for this lies within micro fulfillment centers (MFCs).

Balmiki Bhattacharya, NELSON Worldwide

To meet the increased demand for speed, convenience and lower costs, retailers are adopting MFCs — a reflection of the evolution in e-commerce supply chain solutions for urban areas. In the age of e-commerce giants such as Amazon and Walmart that dominate the marketplace, MFCs are helping other retailers combat the competition in the e-commerce marketplace by lowering the last-mile delivery cost and time. Not to mention, the rise of curbside pickup, BOPIS (buy online, pick-up in store), and click-and-collect services for brick-and-mortar retailers have created a shift from large, centralized distribution centers to small MFCs. We are now finally seeing the true integration of logistics and delivery amongst omni-channel retailers which has been over a decade in making. Many of these MFCs help where there is limited warehouse space availability within the urban core, according to National Cart Co.

Micro Fulfillment: What Is It?

Defined by its small scale, micro fulfillment centers are no larger than 10,000 square feet and are located in an existing store or warehouse as a way of preventing disruption to normal operations. As 2-day or less shipping has become the standard, micro-fulfillment has become the solution to move inventory as fast as possible, while maintaining a close relationship with the consumer — allowing smaller businesses to be competitive with their shipping times.

In addition to reducing costs and transit times, MFCs are also used to improve operational efficiency amongst e-commerce businesses in urban areas by storing inventory much closer to its consumers. Compared to the traditional warehouse that may range anywhere from 200,000 to 300,000 square feet, an MFC stocks just enough inventory for a 24-48 hour operational range and must be restocked frequently. If the center could be located in a store, the retailer serves as the “headquarters” for local pickups and deliveries within a designated region. According to CBInsights, automated and robotic systems can be installed without expanding the facility, ultimately cutting the cost of fulfilling an order by 75%. Companies like Amazon, Walmart, Nordstrom and many others are investing in automated MFCs to fulfill orders and replenish their stores.

Pros and Cons

Though there are many reasons for retailers to implement micro fulfillment centers in their logistical strategies, there are also a few downsides. Micro warehousing requires constant inventory replenishment which can be a challenge for some retailers. One of the solutions is having an automated system in place to facilitate inventory reorders which reduces employment opportunities. Additionally, with frequent restocking, businesses will still need to consider the high cost of transporting goods from one site to another and its environmental impact. Not to mention, micro fulfillment relies on the ever-evolving consumer demands and unprecedented situations may drastically influence shopping patterns and behaviors. The limited storage capacity in these centers makes it challenging to adapt to these changes — as the COVID-19 pandemic continues to prove.

On the other hand, some business models highly benefit from the pros of MFCs — namely grocery retailers. According to Redwood Logistics, grocery retailers are known to suffer from thin margins, and reducing costs wherever possible has a great impact. Because grocery retailers’ business models cater to online delivery, MFCs allow goods to be placed closer to their end-users and for more specialized stocking of the micro warehouses with a methodical use of customer data in that area.

In recent years, the adaptive reuse of the dark anchor store has helped breathe life into defunct flagship stores, whether in shopping or strip malls. To date, retailers have purposefully placed MFCs inside existing stores, garages, parking lots, basements and dark stores. In addition to the sustainability benefits of repurposing existing structures, dark stores require very little additional investments. Dark stores can expect to support up to 50 million in annual sales and can offer 2-3 times greater efficiency in fulfilling orders, depending on the level of automation involved. MFCs also promote opportunities for vacant spaces and unused land. One such place for those looking to invest could be retailers going through bankruptcy. Existing retail spaces in vacant shopping malls have proved to be highly attractive due their size, availability, location and retrofitting ease.

The Future of MFCs

Micro fulfillment centers are becoming quite popular and will continue to be in demand for the foreseeable future. The future of e-commerce continues to evolve and so are consumer expectations. On the downside, large conglomerates and their 1- or 2-day shipping have pressured smaller retailers to keep up with fast delivery times, but they’ve also provided opportunities for innovation within the industrial and logistics market sectors. As previously mentioned, MFCs bring the product closer to the consumer and speed up transit times, ultimately allowing consumers to get their hands on their orders sooner. But the primary limitation is storage capacity and some centers may find it difficult to handle the large replenishment needs. Nonetheless, both large and small retailers reap the benefits of MFCs in a number of ways. Smaller businesses with smaller fulfillment needs may find MFCs ideal for the volume of orders they receive on a daily basis. On the other hand, larger retailers can overcome replenishment times through automation and robotics.

Overall, consumers are shopping online more than ever before, and retailers must keep up with fulfillment operations to meet the demand. As such, micro fulfillment centers are becoming a critical asset for retailers, large and small.

 

 

 

— Balmiki Bhattacharya is vice president, industrial practice sector, at NELSON Worldwide, an award-winning firm delivering architecture, interior design, graphic design and brand strategy services. For more information, visit www.nelsonworldwide.com.

 

 

 

 

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