What’s Driving the Emergence of Micro-Fulfillment Centers?

Companies in every sector of the retail landscape are facing unprecedented e-commerce and omnichannel fulfillment pressures. More consumers than ever are purchasing through online channels, with worldwide e-commerce now accounting for more than 14 percent of all retail sales, and predicted to reach 22 percent by 2023.

This not only dictates faster order fulfillment and delivery, but also the ability to support the growing consumer preference to buy online and pick up in store (aka BOPIS or “click-and-collect”) — not just the next day, but often within a few hours. For grocers and big-box retailers, the emergence of BOPIS service level agreements (SLAs) can present significant disruptions to both their in-store operations and profit margins.

Combined with escalating labor challenges, the scarcity of real estate and the need to digitize fulfillment and supply chain logistics, e-commerce pressures have created a perfect storm of market conditions for micro-fulfillment (MFC) strategies to emerge. Key drivers include:

• Customer demand for faster delivery — Demanding SLAs for next-day and even same-day delivery are dictating the need for improvements to last-mile or last-hour delivery methods, such as moving inventory closer to consumers.
• Increasing urbanization — A growing percentage of the world’s population lives in urban areas. Smaller facilities close to these high-population centers significantly improve last-mile (or last-hour) delivery. Brick-and-mortar retailers can also leverage existing stores.
• Lack of warehouse space in urban areas — Opportunities for new facilities are limited, especially in densely populated urban areas. In these hypercompetitive markets, automation fulfillment solutions that can be deployed within smaller spaces offer ever-increasing advantages.
• SKU proliferation — Unprecedented expansion of product diversity magnifies fulfillment complexities. Grocery retailers have the added challenges of managing dry goods, refrigerated and frozen inventories.
• Labor challenges — High turnover rates, staff shortages and rising minimum wages remain the leading drivers for the acceleration of automated fulfillment processes.
• In-store fulfillment challenges — Fulfilling BOPIS orders has proved problematic and unprofitable for grocers and big-box retailers alike. Many are quickly realizing that using traditional in-store inventory for online order fulfillment is not a sustainable long-term strategy.  

Micro-fulfillment Centers — A New Approach to Distribution

In a micro-fulfillment center model, retailers can expand their capabilities relatively quickly by leveraging existing distribution hubs while implementing high-density automation technologies in urban facilities and retail stores. MFCs are also ideally suited to capitalize on the unique challenges confronting today’s retail sector. Here are three reasons why:

Small Physical Footprint

Compared to traditional automated distribution and fulfillment (D&F) centers, which typically range from 200,000 to one million square feet or more, MFCs typically occupy spaces less than 20,000 sq. ft. This compact footprint offers the flexibility to be located within a small, standalone facility or integrated with (or bolted onto) a retail store.

Distributed Fulfillment Agility

An MFC approach supports a hub-and-spoke distribution model with a regional distribution center (DC) as the hub and multiple spokes located within proximity to urban population centers. This shortens the distance for last-mile or last-hour delivery, while supporting in-store pickup for retailers offering BOPIS fulfillment.

Flexible Automation Solutions

MFCs can maintain an inventory of 8,000–15,000 SKUs with the automated efficiencies to enable accurate, high-velocity fulfillment. Depending on specific fulfillment requirements — such as speed, SKU counts and throughput targets — solutions can range from partially to completely automated scenarios, with proportionate investments in automation and robotics equipment.

MFCs often benefit from supplemental inventory from an attached store or a regional fulfillment center hub. In addition, they can help to reduce the cost of reverse logistics associated with returned goods by reducing return shipping costs. For some products, the time and costs for restocking returns can also be minimized.

EVOLVING RETAIL SEGMENTS DRIVE FULFILLMENT TRENDS

The quickly evolving retail landscape is disrupting traditional brick-and-mortar outlets and dictating new approaches to meeting consumer demands. Here are a few of the key trends that are reshaping the retail landscape:

1. E-commerce in food retail — Amazon’s acquisition of Whole Foods in 2017 permanently reshaped the food retail landscape. To maintain market share, many leading grocers, thrust into unfamiliar waters, were not equipped to meet the demand for online fulfillment. Since then, grocers have made inroads but still are working to develop cost-effective and efficient click-and-collect and home delivery fulfillment models. Online sales are expected to increase from 2 percent in 2019 to 15–20 percent of all grocery sales by 2023.

2. Hub-and-spoke fulfillment model — The unrelenting growth of e-commerce and increasing delivery expectations are dictating significant improvements to last-mile (or last-hour) logistics capabilities. This shift, disrupting traditional logistics strategies, is resulting in the emergence of hub-and-spoke distribution models. The approach relies on large regional hubs and strategically distributed spokes with smaller facilities located near population centers.

3. Flexible, timely implementation — The ability to respond quickly to dynamic market demands has become a true strategic differentiator for retailers. Extenuating circumstances — such as natural disasters and supply chain disruptions — can create unexpected surges in online demands. Retailers need flexible and scalable micro-fulfillment solutions that can be implemented quickly to meet unpredictable e-commerce demands.

Emerging Technologies for MFC Automation

From automated storage and retrieval systems (AS/RS) to sophisticated warehouse automation equipment and robotics, D&F technologies have progressed rapidly in the past decade. Equipment manufacturers are leveraging technological advancements like these to innovate new MFC solutions.

AS/RS Goods-to-Person (GTP) Shuttle

This solution utilizes proven AS/RS shuttle systems but on a much smaller scale. The shuttle retrieves goods from one or more aisles of high-velocity inventory — such as dry goods and refrigerated items — and delivers items directly to an operator station for picking and order consolidation. The goal would be to stock the majority of the SKUs in the MFC and allow the remainder of inventory to be picked off the store shelves or other nearby pick locations, including those in a freezer.

In a typical food retail scenario, a bolt-on MFC would handle 600–2,500 totes per hour, depending on scale. Completed orders could be loaded for delivery to consumers or placed in a refrigerated locker for in-store pickup.

Enhanced Robotic Integration

Advanced MFC systems aim to minimize reliance on manual labor and maximize fulfillment accuracy and productivity. Storage systems can be equipped with mobile robots in a goods-to-robot (GTR) configuration and even have the potential to integrate robotic arm and artificial intelligence (AI) technologies for picking.

With this approach, systems like AS/RS shuttles are still responsible for storage and retrieval, with the addition of mobile robots integrated into the decanting, consolidation and picking processes. But instead of manual labor, mobile robotics transport goods from the workstations on the floor — while robotic arms perform each picking at GTR workstations. These powerful robotic solutions are capable of processing high volumes of data for faster decision-making and offer the flexibility to adapt to a full spectrum of process workflows.

Prepare for the Future of Micro-fulfillment

Rapidly evolving market conditions are dictating innovative, flexible and automated approaches to e-fulfillment — both in traditional DCs and in emerging micro-fulfillment strategies.

As retailers brace for ever-increasing fulfillment demands, their abilities to meet next- and same-day deliveries (or in-store pickup) expectations will be the key to survival in this hypercompetitive marketplace. Those retail leaders who are already adopting micro-fulfillment strategies are gaining a first-mover advantage.

Warehouse automation solution providers like Honeywell Intelligrated are combining robust automation equipment and robotics with advanced execution software to meet the demands for micro-fulfillment across the retail spectrum. Today, our relentless pursuit of innovation is enabling leading retailers to establish stand-alone MFCs or micro-fulfillment strategies within their retail stores. Micro-fulfillment strategies for the future of omnichannel retail stores.

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