Micro-fulfillment: Where it works for retailers — and where it doesn't
As e-commerce demand hits all-time highs, retailers are scrambling to find ways to get items to customers as quickly and cheaply as possible.
One potential solution is micro-fulfillment, which is "a hybrid model that’s using smaller facilities that are much closer to consumers," said Nathan Schmies, vice president of supply chain operations at Hub Group.
Micro-fulfillment focuses on the last mile, said Rudolf Leuschner, associate professor in supply chain management at Rutgers Business School. It blends traditional technology and automation with in-store picking, and it has the goal of getting items closer to consumers for speedy delivery or pickup.
A few industries and business have embraced the fulfillment method. But setting up micro-fulfillment isn’t always cheap, and it’s not easy, especially without technology to track and manage decentralized inventory.
The disruption may not be worth the cost for companies with successful logistics solutions already in place.
Fulfillment from dark retail and grocery stores
Creating miro-fulfillment centers can be expensive up front for retailers, if they plan to lease warehouse space for a new kind of fulfillment center.
However, they do have other options, said Schmies, like running a micro-fulfillment center from the back of a retail store.
Retailers may also opt for "dark stores," which are only for fulfillment — no customers allowed. In October, two Macy’s stores went dark, according to The New York Times. Macy’s CEO Jeff Gennette told The New York Times that it’s an experiment in responding to customers who are buying more online and demanding fast shipping for free.
Whole Foods has also opened delivery-only stores this year as a response to a surge in consumer demand.
Online grocery expected to grow as a percentage of total sales
Total and projected grocery and online grocery sales in the U.S. in billions of dollars
Schmies said grocery retail is where micro-fulfillment has already caught on and is more likely to stay because the sector has high turnover items. Most grocery stores understand their customer demand and know exactly what the highest turnover items are.
While he expects the demand for online grocery orders to slacken some once more shoppers feel safe to go into stores again, he thinks it’s made more consumers comfortable with buying food online, which could keep some of those stores dark for micro-fulfillment in the future.
Micro-fulfillment's niche applications
Another space where micro-fulfillment can work is where there is "volatility on the demand side, where demand could spike way up or way down" said Nader Mikhail, founder and CEO of Elementum. "That way, you have the ability to react to the market without having to wait for a huge long lead time of a traditional supply chain."
Small, high-turnover holiday gifts like candles, blankets and beauty products are a good candidate for micro-fulfillment, he said. "Things that run out relatively quickly and where the trend can easily change."
“You have the ability to react to the market without having to wait for a huge long lead time of a traditional supply chain.”
He also said an item that isn’t always needed but suddenly becomes in demand, like umbrellas in Southern California, would also work. "Whoever has the fulfillment capacity to deal with that in that week is going to capture the market share for the week," Mikhail said.
Leuschner believes micro-fulfillment will find niche applications in smaller and larger companies, and it will "have a place in the whole portfolio of different delivery solutions."
One of those larger companies is Amazon, because "they have millions of consumers that are buying their items," Leuschner said. This summer, The Wall Street Journal reported that Amazon was eyeing vacant department store space for potential fulfillment centers.
That they would be micro-fulfillment centers it not out of the realm of possibility, given that they’re typically located in highly populated suburban areas and closer to the consumer, said Leuschner, adding that he has no inside information on the Amazon’s plans.
If fulfillment ain't broke, don't fix it
Companies need to have robust inventory management and transportation management systems in place for micro-fulfillment to work, or find a partner that can handle "a decentralized inventory approach," said Schmies. "Multiple nodes of inventory just adds complexity."
In addition to being expensive for companies that don’t already have space they can convert, micro-fulfillment won’t work for big and high-ticket items, such as computers, TV, furniture and cars.
New versions don’t come out every few months, and the products don't often shift in response to trends, according to Mikhail.
"This is not stuff you want to have in micro-fulfillment centers, because you’re not spreading your very expensive inventory across a lot of little locations," said Mikhail. "And any time that you need to move it, that’s just very, very expensive."
“Multiple nodes of inventory just adds complexity.”
Leuschner is not that bullish on micro-fulfillment. He said mid-sized companies will come up against the cost, both in space and for the technology solutions required, of using it across their organization.
"If you look at the majority of companies, they have pretty well-established logistics systems," Leuschner said. "What’s the real impetus to change something that’s working well?"
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— Supply Chain Dive (@SupplyChainDive) December 1, 2020
