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December 23, 2021

A Guide to Micro-fulfillment: Strategies and Results

During the COVID-19 pandemic, online shopping boomed and retailers struggled to shift their supply chains in response. To offer free one- or two-day shipping to compete with Amazon, companies began reshaping their supply chain operations to incorporate more automation and smaller fulfillment centers closer to customers. Called micro-fulfillment centers or MFCs, these small warehouses hold a small assortment of hot products for rapid shipping.

What Is a Micro-fulfillment Center?

While there are no hard-and-fast rules, an MFC is typically 3,000 to 10,000 square feet and can hold up to 15,000 different items. Highly compact designs allow for more products per square foot than a conventional warehouse, which can be as large as 300,00 to 1-million square feet.

Today, retail stores and e-commerce sellers are utilizing these MFCs and investing in technology to manage tight turnaround times and increasingly high customer expectations in 2021 and beyond. The grocery industry has been an early and ardent adopter of MFC, only accelerated by the boom in contactless shopping during pandemic restrictions. A recent study predicts there will be one MFC per 10 grocery stores by 2030.

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Why Micro-fulfillment Centers Are Gaining Popularity

The last mile represents 41% of supply chain costs, so companies are looking for ways to spend less while satisfying customers. Experts estimate that micro fulfillment reduces cost per order by 75 percent.

Regardless of how long it is, the last mile is the final step of delivery, whether a driver places a package on your porch or a truck backs up to receiving dock at a business.

Thanks to Amazon, 75 percent of consumers expect delivery to be free even on orders less than $50, according to research from the National Retail Federation. Traditional regional distribution hubs can't keep pace with the e-commerce boom.

"Companies are learning from Amazon they need to be faster, cheaper and closer to the customer," said Nicolas El Baze, general partner at Partech Partners, a venture capital fund with global technology investments.

An MFC strategy is the alternative to a legacy network of large regional distribution centers. 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.

Where Are Micro-fulfillment Centers Located?

Companies are siting MFCs in urban areas or regional population centers. An MFC may be an infill warehouse development, a re-purposed existing building, or created in the backroom of an active retail store or a store converted for fulfillment only. These converted locations turn non-performing real estate in population centers into supply chain assets known as dark stores.

Most big-box retailers put most of their goods out on the sales floor, with only small stockrooms, which doesn't leave enough space for e-commerce fulfillment. It's costly and time-consuming to have pickers roam the floor, pulling items for orders off the shelves. That's how Kroger and some other chains have done it, but they're moving to automation. Kroger, for example, is investing in highly automated warehouses to pick perishable items and packaged goods for consumer orders.

Rod Werner, City National's Managing Director of Technology and Venture Capital Banking, pointed to other reasons companies establish MCFs. Specialty retailers like Nordstrom or Lululemon may prefer to manage their own fulfillment rather than outsource to Amazon to maintain their brand identity. High-end boutique food items benefit from distribution closer to the customer because they don't have the scale to sell through Amazon.

"When people want fresh farmers market items, you need to have local fulfillment," Werner said.

In addition to large retailers, small-to-medium-sized e-commerce companies are turning to specialized fulfillment providers. They can offer customized services to handle products that don't ship in standard-sized cartons, such as garments on hangars, fitness equipment, health and beauty items or other products with specialized packaging.

"They need a provider in strategic densely populated markets they can serve with same-day or next-day delivery, or pick up at a locker or service center," said Steve Syverson, vice president of customer solutions for Warehouse Anywhere, a third-party logistics provider.

What Micro-fulfillment Centers Enable for Companies

A traditional distribution center trucks in pallets of products and then builds a product mix for each store. An MFC deals in units or individual products. Robots – or human workers – pick items from bins or shelves to fill customers' orders. A standard warehouse may turn over inventory once to two times per year, while an MFC may see eight to 10 turns per year for fast-moving products, Syverson said. The MFC may not hold all of a company's products, but only the top sellers.

Emerging markets have adopted micro warehousing faster than mature markets because they don't have the legacy infrastructure that slows the pace of change. Also, markets may be fragmented due to culture and geography. Indonesia, for example, is made up of thousands of islands, so moving inventory closer to customers for faster fulfillment makes sense. In the U.S. and Europe, products can be moved where they need to be within a few days by highway.

How Artificial Intelligence Makes Micro-fulfillment Work

In the past, human buyers developed product assortments and clothing sizes based on their experience and gut instincts. Today, companies like Amazon, Google and Costco track buying patterns and develop predictive intelligence based on that data. These data-driven retailers continuously change their product mix based on purchasing behavior.

It's becoming easier to accurately predict what products will sell well, so a retailer can decide what to buy and when, and where to store it. For example, a curated e-commerce collection can predict how many of a particular product will sell before the sales campaign is launched.

"Those products can be very quickly available to the consumer at no risk because you're able to predict sales," El Baze said.

It's vital in a high-velocity micro fulfillment center to know where products are located, inside and outside the building. New technology provides visibility to the warehouse shelves and inside the trucks rolling along highways and in containers on the ocean. Shippers know what inventory they have on hand and what products are inbound to the warehouse.

Without that insight, the inventory strategy is no better than an educated guess.

"The intelligence is absolutely crucial; otherwise, the infrastructure is a waste of time and money," El Baze said.

Inside an automated warehouse, dynamic slotting software rearranges popular items so the robots can pick the most-often-sold items faster, shaving seconds off each transaction.

In many MFCs, particularly grocery and other locations that handle products that are literally outside the box, humans work with robots to fulfill the orders. In the Kroger warehouses, the first of which opened April 2021 in Cincinnati, robots and conveyor belts bring products to a packer, who selects items for each order. Robots still have trouble handling irregular objects like fresh produce.

Companies Share Warehouse for Shipping Fulfillment

As more companies restructure their fulfillment operations, there are opportunities for companies that have nothing to do with each other to share existing warehouse space.

A specialty provider with existing warehouse space can open an MFC in about 30 days, Syverson said. The provider can coordinate with a tech company like Deliverr that connects sellers through online marketplaces, including Walmart.com. Delivrr's algorithm identifies the ideal spot to locate inventory based on order patterns and then selects the shipping speed required to meet service commitments.

"We see an opportunity for businesses to provide logistics as a service, both the technology layer and the physical layer, which is necessary for physical goods," El Baze said.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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