eCommerce enjoyed explosive growth in 2020, with a 44% year-over-year increase from 2019, according to an estimate from the research organization Digital Commerce 360. While a great deal of that spike was due to the COVID-19 pandemic, online retail was on a continual rise long before reports of COVID emerged. Case in point: Estimates from Digital Commerce 360 report that online sales growth of 15.1% from 2018 to 2019.
As demand for online retail has increased, so have customer expectations. A 2020 survey from software company ShipStation revealed that two out of three consumers expect free shipping options from brands, especially in light of the COVID-related shipping delays that plagued retailers. And the stakes are high: 87% of consumers surveyed said a bad shipping experience made it less likely they’d return to that retailer in the future.
Add to this the fact that the last mile can often be the most expensive part of an order’s journey, and it’s easy to see why many companies are searching for new fulfillment solutions.
Enter micro-fulfillment. It’s not for every brand, and its advantages come with challenges. However, some industry experts believe it has significant future potential. For example, a recent market research study from LogisticsIQ suggests that the micro-fulfillment market could be worth up to $10 billion by 2026, with a base of more than 2,000 micro-fulfillment centers, if current trends hold steady.
In this Industry Update, we’ll take a closer look at how companies are harnessing micro-fulfillment strategies to deliver orders to consumers faster and cheaper. We’ll also show you some of the challenges these companies have encountered, so you can understand what this logistics trend might mean for the future of your supply chain.
What Is Micro-Fulfillment? And Who’s Embracing This Strategy?
Micro-fulfillment is a method of delivering customer orders by establishing smaller fulfillment centers in accessible locations, with the goal of locating them closer to customers in order to reduce last-mile delivery costs.
Although the strategy varies from company to company, micro-fulfillment can involve:
- Placing MFCs (micro-fulfillment centers) in densely-populated areas, such as urban settings, to reach a critical mass of customers.
- Automating some or all of the picking and packing process.
- Setting up an MFC in a retail location, such as the back of a store, so that the MFC and the retail location can share inventory.
Micro-fulfillment strategies have proved popular within the grocery industry. Online grocery sales more than doubled in 2020, jumping from 4.3% to 10.2% of all grocery sales. Additionally, with the cost of order fulfillment projected between $10 and $25, grocery retailers such as Walmart, Albertsons, Kroger, and FreshDirect have all been exploring the possibilities of micro-fulfillment with interest.
Let’s take a closer look at what micro-fulfillment has offered these grocers—and other retailers.
The Advantages of Micro-Fulfillment
The ultimate goal of the micro-fulfillment strategy is to reduce transportation costs while enabling prompt order delivery for consumers—the best of both worlds. By locating their MFCs in locations close to consumers, largely in densely populated areas, retailers are hoping to keep their final-mile delivery distances and speeds to a minimum.
Additionally, through automation, retailers also hope to reduce the overall cost of fulfilling these orders by using robotic systems to pick and pack as much as possible.
In addition to grocery stores, retail stores are also picking up on the trend. Nordstrom recently opened a location in Newark, California, where they’re working with two robotics start-ups to automate picking and packing of beauty orders, like lipstick and perfume. These kinds of strategies have allowed them to offer one-day delivery in select zip codes. If this pilot proves successful, they plan to expand the strategy to eight additional distribution centers across the U.S.
The Challenges of Micro-Fulfillment
As you might expect, micro-fulfillment does come with its challenges.
Certain items simply aren’t easy for robotic arms to pick. For example, consider loose produce, which, in addition to being awkward to pick up, also needs special care to avoid bruising. Poly bags and self-sealing mailer bags have also proven notoriously challenging for robotic arms. Although Soft Robotics’ SuperPick Polybag Picking System is a start, these items still represent a much bigger challenge for retailers.
Additionally, as you might imagine, setting up a micro-fulfillment center requires a significant investment. The automation hardware and technology is simply the tip of the iceberg. Companies who struggle to track and/or manage their inventory will find that MFCs can add a new layer of confusion and complexity. As such, if an organization doesn’t have strong inventory and transportation management systems currently in place, it will need to invest in those areas before going big on micro-fulfillment.
Even though these challenges exist, some companies are creating alternatives, ones that borrow select strategies from the micro-fulfillment concept without requiring an investment in robotic technology or a warehouse build-out.
One involves opening small fulfillment centers in the back of stores or in “dark stores.” For example, Macy’s closed two stores in Delaware and Colorado and used those spaces as fulfillment centers during the 2020 holiday season. Whole Foods has done the same with dark-only stores in Chicago, Austin, San Francisco, Baltimore, and New York City. In these locations, humans currently do the picking and packing, offering these companies the chance to investigate the future of this model before heavily investing in automation technology and new real estate.
Micro-Fulfillment: Temporary Trend or Long-Term Strategy?
Is micro-fulfillment the supply chain strategy of the future? Or is it simply a flash in the pan, one that will dissipate once post-COVID life returns to normal? As with many of the trends that have been accelerated by the pandemic, the future remains uncertain. It’s possible that eCommerce will continue to grow, justifying retailers’ investments in MFCs. Alternatively, a significant change in the marketplace—or in technology—could mean that these investments fail to offer the return that retailers anticipate.
Whether or not it’s here to stay, expect to see micro-fulfillment strategies paired with other fulfillment methods such as in-store picking, dark stores, and centralized distribution centers. Supply chain managers will likely utilize micro-fulfillment within a bigger mix of strategies to continue to meet consumers’ changing needs—and satisfy their organizations’ bottom lines.
Interested in re-evaluating your fulfillment strategies with one of our supply chain pros? We can help you find the right balance that keeps your customers happy and your budget in line. Reach out to us for a free consultation. Together, we’ll evaluate where you are and how you can optimize your strategies for the coming year—and beyond.
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