With labor expenses increasing, small parcel shipping becoming more expensive and carriers struggling to support the volumes at holiday, companies are implementing new strategies with micro fulfillment centers or MFCs.
An MFC is a smaller footprint facility. They rely less on manual labor and more on automation, making them more scalable to seasonal peak volumes. Generally, these facilities are located in cities to be closer to the customer. The automation and proximity reduces order turnaround and delivery time to same day or even a couple hours, saving on small parcel costs.
For a segment of multichannel retailers and ecommerce companies, the concept of MFCs is not new. They’re not for every company, but it’s worth assessing how MFCs might fit into your fulfillment network strategy.
Traditional B2C ecommerce fulfillment is handled by one or two facilities servicing the U.S. and global orders. Major retailers may have multiple domestic and even international fulfillment centers.
MFCs, on the other hand, are typically supported in a variety of footprints, such as through the backrooms of larger retail stores or smaller warehouses. They’re replenished from larger distribution centers within the network.
A number of forces are driving MFC deployment. Ecommerce sales have been growing at a faster rate than stores for a number of years, with COVID has accelerated this shift.
From a real estate perspective, retail consultancy Coresight Research estimated that 15,000 stores permanently closed in 2020 vs. 9,548 in 2019. This has left many cities with shuttered storefronts and rock-bottom leases on many different sized properties that can be flipped to fulfillment.
With COVID, many retailers ramped up ship from store or FC, along with contactless curbside pickup. Experts and mall developers don’t see these major shifts giving back anything significant to brick-and-mortar retail.
Amazon continues to invest tens of billions in logistics and fulfillment including Prime Air, its truck-and-trailer fleet and legions of independent contractors in last-mile vans. With Prime Now, you can get tens of thousands of items delivered in 1-2 hours. According to industry forecasts, the number of Prime members in the U.S. is projected to reach more than 153 million in 2022, up from 142.5 million in 2020.
In the summer of 2019, Amazon started announcing its own MFCs close to cities, about a tenth of the size of its typical FCs. Even those facilities would be large for companies in the $50 million-$75 million range.
All of these factors combined favor an MFC 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. Macys has been experimenting with dark stores in Delaware and Colorado, retail locations that just support ecommerce order fulfillment.
While MFCs aren’t for everyone, there are numerous benefits to both merchants and consumers. These include:
- The ability to order online and pickup locally the same day.
- Same-day local delivery options and lower costs for shoppers within a 40-60-mile radius.
- The potential for reduced freight costs. To determine this, you’ll need to assess your total freight spend, volume and accessorial charges.
- Automation reduces labor costs and staffing challenges. While an MFC requires more upfront automation investment, they can scale to peak volumes without hiring, training and increased labor costs.
- Lower facility costs than traditional fulfillment. With the downturn in brick-and-mortar stores, larger footprint locations are available at decreased lease rates.
MFCs are supported through a variety of facility types. The footprints are dictated by the SKU assortment strategy, level of automation and potential order volumes. Typically, they include as mentioned retail backrooms and dark stores, which may also have an order desk for customer pickup, with a footprint of 10,000 square feet or less.
Labor Cost and Availability Driving Automation
Regardless of the building type, MFCs by virtue of being highly automated can handle large throughput with relatively few employees. These days, there are literally millions of jobs not being filled. A minimum wage of $15 per hour is not an “if” but a “when.” Walmart and Target are already hiring above that rate. Bank of America said its minimum wage will be $25 per hour by 2025. You can learn more here about how automation how Is reducing costs and improving order turnaround time in several companies.
There are a wide variety of automation technologies supporting an MFC. These facilities are engineered to not only minimize labor but reduce picking distance and time, servicing one- to two-hour delivery and pickup.
MFCs typically use goods-to-person order fulfillment combining automated storage with accurate, ergonomic picking. Products are stored in a cubelike array and sent via shuttles to operators. However, there are many other options depending on fulfillment requirements, types of product and order demand.
An MFC strategy will rapidly change retail, wholesale and ecommerce order fulfillment. While it’s not for every company, it’s definitely worth evaluating to determine if and how it can be successfully leveraged.
Brian Barry is President of F. Curtis Barry & Company