Thoughts on micro-fulfilment

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Driving retailers into a perpetual state of frenzy, the global health crisis had them striving to gain a foothold between soaring consumer expectations and shrinking delivery timelines. The Amazon effect that conditioned consumers to expect dramatically faster delivery options has also rubbed off onto multiple retail categories, especially grocers. Given the perishable nature of goods and a myriad of SKUs to handle, the pressure of time and demand only adds to their plight to keep up. 

According to a recent report by Mercatus, only 4.3% of grocery sales were online in the pre-pandemic era. However, it is estimated that online grocery orders will account for 21.5% of total grocery sales by 2025. It is not difficult to fathom how the pandemic accelerated the shift to e-commerce by roughly 5 years, as observed by IBM’s 2020 U.S. Retail Index report. 

What exactly is a Micro Fulfilment Centre? 

As speedy delivery has become indispensable for staying put, retailers across the globe are increasingly embracing small footprint automation systems coupled with efficiency-boosting technologies, through micro fulfilment strategies. A micro fulfilment centre or MFC is a highly automated mini distribution centre used to store inventory closer to the end customer. Typically set up in a small area of around 10,000 square feet or less with efficiency to handle thousands of SKUs and deliveries per day, MFCs enable optimum space utilisation and huge cost savings to online retailers. 

Normally consisting of two fundamental components - the physical infrastructure and software management systems, MFCs often deploy automated assets such as robots to sort, pick, and shuttle items from storage racks to packing staff, after processing online orders using software management systems. They can function as stand-alone facilities supporting a cluster of sites or be integrated into existing store infrastructure. 

Micro fulfilment for mighty strides 

Thinking small makes big things feasible for MFCs. A sharp contrast to its traditional counterparts, being compact can be considered an evolutionary advantage for these modular facilities- one which makes them financially and logistically viable on various counts. 

● On a very basic level, they can be accommodated in densely populated cities and urban centres, placing them at an advantage in comparison to the sizeable, centralised distribution hubs (as large as 300,000 square feet) situated in city outskirts or on industrial estates. 

● This in turn slashes the transportation costs and time taken for last-mile delivery, thanks to being strategically deployed closer to the customer.

● Another enticing advantage of setting up small is reflected in its start-up cost- a fraction of setting up a traditional fulfilment centre or just around half the cost of a new supermarket! The system can also go live in a matter of months.

● The modular nature of MFCs allows them to have high storage density by utilising cubic volume of space and enables easier quality control and data management.

● Some other benefits include lower leasing & operating costs. As per an analysis by financial services company Jefferies, micro fulfilment could reduce order-related costs by as much as 75%. 

Micro-fulfilment technology providers like Alert Innovation, Dematic, and Swisslog are enabling the likes of Walmart and Amazon to make strides in their MFC strategies across the globe. On the other hand, by decentralising distribution, MFCs are also democratising the automation market for multiple players. It’s common to see specialised MFC companies coming up that offer services to smaller groceries for their distribution close to the consumers. Some examples are Fabric, Takeoff (powered by Knapp technology) and Davinci (powered by Addverb Technologies). What this offers is a level playing field for smaller players, to compete with larger competitors, allowing them to bypass the mammoth undertaking of developing technologies on their own- for which, the cost, time, effort and labour spent could even take a toll on their sustenance, or even survival.

By partnering with automation solution providers like Addverb, retailers, grocers, and specialised MFC companies are equipped to ride the wave of super fast delivery, without the worry of non-fulfilment or oversight. Adapting a nuanced design thinking approach by closely studying the retailer’s existing operational capacities and meticulously identifying requirements unique to each business, Addverb Technologies has been able to offer customised solutions tailored to the tastes and preferences of specific customer groups. Paying attention to details like these enable retailers to exercise greater control over inventory management, and stock the most relevant SKUs, in line with local preferences. Out of the many compelling reasons to go the MFC way, it is also interesting to note how they aid predictive technologies that can ensure timely stocking and restocking of in-demand items, by allowing retailers access to useful data related to consumer behaviour and map patterns in online purchases. 

Navigating the paradigm shift in a hyper-competitive space

The highly volatile and demand-driven nature of e-grocery allows little room for error, and counts on speed and accuracy of operations, neither compromising the other. The technology for an MFC is a mix of more fixed and flexible ways of automation. For fast-moving and fixed SKUs, the Quadron shuttle would be the best fit. For slow-moving and flexible SKUs, the Veloce AMR is the best call. Each of these robots delivers with 100% accuracy and minimal human intervention. With the micro fulfilment centres created by them, cutting down picking time to only a few minutes is an achievable feat.

The adoption of automated MFCs is observed to be significantly higher in the United States as compared to Europe. This can be attributed to a number of reasons including the U.S.’s sparser population which makes it imperative to adopt a decentralised approach since centralised fulfilment centres or CFCs make same-day deliveries harder in the suburbs than it is to do the same in the more densely populated European cities. MFCs in the U.S. are also incentivised by progressively improving ROI, owing to the fact that the massive size of American stores and their parking lots pose a hindrance to manual picking by rapid delivery companies. It is also interesting to note how delivery expectations of U.S. customers have propelled the growth of same-day delivery, as the concept of grocery home delivery had not really taken off in the United States until the pandemic and when it did, it was pioneered by same-day delivery companies, thereby setting new and desirable standards. On the contrary, home delivery was already a decade-old enterprise in European countries such as the UK where the customers were accustomed to the slower delivery times- usually more than 24 hours. 

What the future holds for Micro Fulfilment Centres 

A market research study by LogisticsIQ estimates that the micro fulfilment market is expected to have a cumulative opportunity worth ~$10B in the next few years by 2026, with an installed base of ~2000 MFCs if technology and concept remain permanent. The study also projects an expected growth of CAGR ~60% in the micro fulfilment market, between 2020 and 2026, with a maximum market share from the U.S. Developments also looks promising in Europe and APAC, particularly for countries like the UK, France, Japan, and Australia. With a market share of 70%-80%, grocery is expected to be the main contributor to this market. 

Fast delivery options including same-day delivery may have been a bonus offering during the Q-commerce kick-off, but not anymore. It is increasingly becoming the standard, and not the exception, for every retailer, to win consumer preference over competing players. The efficiency of retailers in finding their way around this strategic necessity, and proactively prepping for likely changes to come, will have a significant impact on their bottom line and market share. The consumer has tasted super-fast delivery and now, there’s no going back. 

Pieter Feenstra is the CEO of Addverb Technologies’ EMEA region. Addverb’s expertise includes IoT, robotics, and warehousing consulting. Addverb has provided warehouse automation solutions to companies such as Unilever, Amazon, Flipkart, PepsiCo, Coca-Cola, ITC, and more.