The Evolving Use Case of Micro-Fulfillment Centers

Exploring the benefits and challenges for grocery retailers looking at adding a Micro-Fulfillment Center.

As the online grocery market continues to mature, grocers are focused on taking control of their e-commerce supply chains by investing in their own online storefronts and scaling in-house fulfillment operations. Everything from fully-automated warehouses to stores-on-wheels is being considered.

Dedicated storage facilities such as Micro-Fulfillment Centers (MFCs) have grown in popularity in recent years, seen as a key strategy to address challenges caused by the growing demand of the e-commerce channel. Investing in an MFC could help to alleviate the impact of labor shortages and create the potential for higher product availability and freshness. As grocers begin to make capital investments to scale online order fulfillment, they face questions such as: How can we drive more capacity without more labor? When is it cost-effective to build an MFC? How can we continue to invest in optimizing store picking operations?

Why are grocers building MFCs?

The economic hurdle to justify an MFC to replace store picking operations gets higher as operational enhancements increase the picking efficiency in stores, general merchandise is introduced, and order volumes vary by season and geographic location. Unless the MFC encapsulates the entire catalog of products, the orders still need to go through stores, offering little to no savings on a per-order basis. When comparing the large up-front capital expense required for MFCs versus the advancements of in-store picking, one begins to question the capital expenditure required and the return-on-investment (ROI).

For example, if an online grocer were looking to go from picking 30-40 UPH in a store to 300-400 with an MFC, this growth in throughput ostensibly could justify the 7-figure capital expenditure. However, grocers are improving in-store picking rates dramatically, in some cases achieving over 150 UPH, making it much more difficult to rationalize the ROI and payback period of investing in an MFC, especially if one’s order volume is increasing at a slower pace than your order fulfillment rate.

Over the past two years, the motivation behind building MFCs moved beyond profitability and evolved to mitigate the impact of labor shortages. Grocery retailers are scaling their online channels and are looking to streamline core processes through automation, accelerate delivery and ensure accurate labeling and delivery. By using modular automated technologies in their MFCs, grocers can effectively increase capacity without more labor.

That being said, it’s important to note the corresponding challenges, other than costs of construction. As these operations begin to scale and more MFCs are launched in the same regions, inventory becomes decentralized, introducing an additional layer of complexity for inventory management. Also, despite the attractiveness of their small footprint because they can be placed in Urban areas, MFCs lack the storage space to accommodate a full product catalog. This is especially true when considering stores that sell general merchandise. For grocers, MFCs should only be stocked with high-demand, fast-moving goods to facilitate quick fulfillment. The aspirational benchmark for grocers is to fulfill 80% of orders in their MFCs, which will then be transported to the store where the remaining 20% will be picked.

Optimizing the final 20%

As grocers steadily bring the fulfillment operations in-house, their goal is twofold: (1) improve the overall shopping experience and alleviate the burden of change for the customer; and (2) make it easy and seamless for store teams to pick the orders (often aided through technology).

Additional elements of a holistic fulfillment program include associate productivity (i.e. labor specialization and scheduling optimization) and store format considerations (i.e. store layouts and picking sectors/zones), as well as conducting analytics around slot availability, utilization, and dynamic pricing to ensure that the highest-demand slots are always profitable.

In an article published by Grocery Dive, Sam Silverstein spoke with Barry Clogan, Chief Product Officer of Wynshop, to discuss the importance of using digital ordering technology, like Wynshop, to track product availability and pick up on potential supply issues.

Some grocers are finding efficiencies through labor specialization and creating an optimal number and type of picking sectors. Some grocers are evaluating the idea of adopting labor specialization in sectors such as fresh produce, as associates become experts in those areas, their picking quality and efficiency will improve.

Ultimately, grocers are looking to control their own destiny by bringing fulfillment in-house. By owning more of their e-commerce supply chain, they’re able to control the quality of each interaction with their customers. MFCs could be a potential strategy for new digital propositions such as Quick Commerce, or for densely populated areas with high online order volumes. However, the business case for MFCs in traditional grocery has evolved, forcing grocery retailers to consider a more holistic fulfillment program, balancing between strategic capital investments (such as MFCs), and a broader rollout of in-store technology and processes to optimize store picking operations.