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Micro-fulfillment: What is it and is it right for your business?

illustration of people interacting with items on a warehouse shelf

What if you could get online orders to your customers fast enough to foster brand loyalty, but without breaking the bank? 

It’s the ultimate challenge for today’s ecommerce merchants, who are grappling with rising expectations surrounding home delivery and omnichannel shopping capabilities. 

But there’s one strategy that’s emerged rapidly during the pandemic as a silver bullet to managing the last mile delivery problem: Micro-fulfillment. 

This hybrid fulfillment model has offered retailers a highly effective strategy for achieving rapid delivery and lowering shipping costs. Everyone from big-box retailers like Target to mall favorites including American Eagle and Macy’s have invested in micro-fulfillment strategies in the last year. Even Amazon, the undisputed king of ecommerce, is looking at micro-fulfillment as a way to simplify its supply chain and maintain its edge in fast shipping. 

However, micro-fulfillment also costly and time-consuming to implement independently – and may not even be necessary for your business.

So, how do you know if micro-fulfillment is the right fulfillment strategy for your business?

What is micro-fulfillment?

Micro-fulfillment is a logistics strategy where online orders are fulfilled from facilities close to the end customer. These are known as ‘micro-fulfillment centers’, or MFCs. 

Depending on a retailer’s size and the geographic distribution of its customers, they might use one localized fulfillment location or several ‘nodes’ to cover a regional or national footprint (also known as multi-node fulfillment). At around 2,000-10,000 square feet, MFCs are significantly smaller than a standard distribution center, which can be as large as 800,000 square feet.

The purpose of micro-fulfillment is to achieve faster and cheaper last-mile delivery by bringing products to strategic locations in either metro or suburban areas. This is assisted by advanced automation technology, such as real-time Order Management Systems (OMS) and handheld terminals to guide order picking activities on the most effective travel routes.

In doing this, micro-fulfillment enables much more rapid delivery capabilities such as next-day or even same-day delivery. This means more satisfied customers and enhanced brand loyalty.

Micro-fulfillment strategies have several other advantages, such as:

  • Enabling advanced O2O (online-to-offline) shopping capabilities (e.g., BOPIS, BORIS, curbside pick-up)
  • Reduced labor costs
  • Ease of scaling
  • Responsive to consumer demand
  • More resiliency in the case of disruption

Micro-fulfillment strategies can take several different forms, depending on a retailer’s needs and capabilities. A common approach is so-called ‘dark stores’, where an existing store is converted into a fulfillment center. In this set-up, the staff’s sole focus is to assemble orders for home delivery or pick-up. Otherwise, a retailer may have a warehouse at the back of a store location to handle online orders in-house, or else outsource fulfillment to a 3PL with a network of MFCs.

Why micro-fulfillment is the latest trend in logistics

The COVID-19 pandemic has caused seismic changes within the retail landscape. With newfound shopping habits showing serious ‘stickiness’ amongst consumers, retail is certainly not going back to business as usual. This has led many brands to begin seeking out advanced micro-fulfillment solutions to tackle these disruptive, long-term trends:

More consumers are working from home

Shelter-in-place orders across the country forced millions of office workers to work from home during 2020 and 2021. But as restrictions come to an end with the vaccine roll-out, signs are pointing to a permanent shift in our work culture.

According to a survey by Flexjobs, 65% of workers want to continue working remotely, with ‘cost savings’ and ‘better quality of life’ cited as the top reasons. Even if most workers enter into a hybrid arrangement of home and office work, this dramatically changes the balance of consumers basing themselves in suburban areas rather than downtown office hubs.

With remote workers unlikely to want to drive into busy urban areas to pick up orders or return items, this long-term shift poses a significant challenge for retailers. Those who’ve traditionally relied on flagship locations in major shopping precincts may find themselves starved of their usual sources of foot traffic. By bringing locations closer to the end customer, brands are much better placed to increase sales.

Increased demand for rapid home delivery

With brick-and-mortar stores shuttered due to pandemic restrictions, consumers turned to ecommerce in unprecedented numbers during 2020. According to Digital Commerce 360,  ecommerce saw a 44% increase in growth between 2019 and 2020, with a further 12.8% growth predicted for 2021.

Grappling with a sudden increase in orders and an overstretched parcel network, retailers have been faced with mounting delivery delays and high surcharges with major carriers – just as consumer expectations for fast delivery have never been higher. 

According to the Wall Street Journal, 63% of online shoppers considered 3-4 day delivery to be ‘fast’ back in 2015, which had dropped to 42% in 2016. But today, 96% of consumers consider ‘fast delivery’ to mean same-day delivery. Without a more localized approach to fulfillment, brands will struggle to meet customer expectations

Growth in popularity of BOPIS and curbside pick-up

However, even same-day delivery struggles to compete with the immediacy of in-store shopping. This is something that consumers have clearly identified in their desire for more O2O shopping options; 50% of consumers are now choosing who they shop online with based on the availability of click and collect. Meanwhile, 90% of retailers say that they plan on offering BOPIS as a delivery option by the end of 2021. 

With retail stores now playing a bigger role in the ecommerce fulfillment process, this necessitates a more formal approach to inventory management and order fulfillment.

Micro-fulfillment vs. store-based fulfillment: What’s the difference?

The pandemic has seen store-based fulfillment skyrocket in popularity, especially amongst smaller retailers who are implementing BOPIS and curbside pick-up for the first time. However, store-based should not be confused with micro-fulfillment.

On the surface, store-based fulfillment has all the hallmarks of a micro-fulfillment strategy. It involves the use of strategic retail spaces to fulfill and/or ship products to the end customer. 

A typical store-based fulfillment strategy involves customer-facing retail staff doubling as pickers for online orders. On an as-needed basis, staff will conduct manual picking of items directly from the shop floor and prep them for delivery or pick-up. 

However, because staff are gathering items from the same aisles browsed by customers, pick locations cannot be optimized in the same manner as a warehouse. 

Instead of in-demand SKUs being arranged close to each other, staff may face extensive journeys between picks. Store displays are usually rearranged frequently, which creates additional difficulties with finding the right items. 

In sum, associates in a store-based fulfillment model lack the technological support and infrastructure provided by the purpose-built facilities of a full-fledged micro-fulfillment strategy. Relying on existing floor space, staff, and inventory to carry out each order creates massive inefficiencies and a higher likelihood of errors such as stockouts or incorrect picks.

The challenges of store-based fulfillment

Store-based fulfillment is at best a short-term response to a spike in demand; it doesn’t have the necessary capabilities to scale effectively.

With COVID-19 restrictions coming to an end in many states, we’re seeing shoppers coming back into physical stores in higher numbers. This means that retailers are now having to grapple with the difficulties of having in-store shopping and ecommerce fulfillment under the same roof.

Having pivoted to handling booming online sales during the pandemic via store-based fulfillment strategies, big-box retailers and department stores are finding out the hard way that it’s not so easy to accommodate their customers’ needs across channels.

Back in April, Walmart and Macy’s faced criticism from retail analysts for letting fulfillment activities spill over into customer-facing areas. Empty shelves, messy store displays, and a lack of customer care staff have become persistent problems – all of which have hurt the in-store experience.

The underlying problem is that online consumers want their orders delivered fast, while in-store shoppers want to enjoy a pleasant customer experience. And when store visitors are forced to compete with their online counterparts, these priorities end up clashing on the shop floor.

If the experience in ecommerce is more positive than being an in-store shopper, this gives consumers little incentive to shop in person.

In short, store-based fulfillment can easily lead you on a path to cannibalizing your in-store sales. And once this happens, it’s very difficult to entice customers back again. 

For more on this topic, read our dedicated blog on why retailers should avoid store-based fulfillment.

Is micro-fulfillment right for your business?

With retailers fighting an uphill battle to meet consumer expectations for rapid delivery and omnichannel shopping experiences, micro-fulfillment has become the latest battleground in the endless fight for competitive advantage.

Most of those who’ve pivoted to store-based fulfillment in the past year have done so out of necessity; COVID-19 was a rapidly evolving situation in the second quarter of 2020, and retailers were forced to respond as quickly as they could to meet consumer demand. 

But as the retail sector recovers from the pandemic, retailers need to consider whether their current approach is still fit for purpose – or whether they need to invest in a proper micro-fulfillment strategy to avoid the issues talked about above.

So, how do you know whether micro-fulfillment is the right approach for your business?

You have a good understanding of where your demand hubs are

For micro-fulfillment to work effectively, you need to have a strong understanding of where your customers are based. This is because MFC locations are carefully chosen so they’re near key ‘demand hubs’ for the fastest possible home delivery or short car journeys for consumers using BOPIS or store pick-up. 

This can be a very tricky balance for retailers to get right; if a micro-fulfillment facility ends up being too far away to adequately serve customers in a particular area, this negates the benefits of this approach. In fact, you could end up with higher shipping costs than did in the fast – and longer delivery timeframes for some of your customers. 

So, it’s vital that your retail business knows not only which areas warrant their own MFC, but also be able to forecast customer growth in other places to determine future expansion opportunities. 

You have fast-moving, seasonal, and/or perishable inventory

It’s important to note that micro-fulfillment is not a new innovation. Product categories that are perishable and experience high turnover, such as grocery stores, helped spearhead this formula to enable faster delivery and better maintain product integrity.

Grocery fulfillment is a specialized area where the freshness of grocery orders is key to customer satisfaction. So, it’s not surprising that Grocers including Kroger, Ahold Delhaize, and Albertsons have invested heavily in MFCs.

Micro-fulfillment can also be utilized by retailers whose inventory is seasonal and needs to reach customers quickly before demand drops. 

For example, if you’re a fashion retailer who releases new collections regularly, your SKUs must be in the right locations to fulfill orders quickly and capitalize on short-lived trends. With a micro-fulfillment strategy, retailers have an extra source of inventory they can make available to popular storefronts located nearby, while also allocating online orders to the MFC able to fulfill and ship the fastest.

You’re handling consistently high order volumes (and not just because of the pandemic)

High online order volumes over the past year have led many traditional brick and mortar brands to invest in more robust ecommerce fulfillment strategies. But according to NPD, sales from in-store shopping are now exceeding pre-pandemic levels, while ecommerce sales are down 9% on the weekly average in 2020. 

While can be partially explained by the pent-up demand for physical retail, there’s no doubt that brick and mortar is having a resurgence. With ecommerce growth beginning to taper off, brands need to take note of what this means for their selling channels.

If you’re still handling upwards of 500 orders per day, this is likely to overwhelm even the most organized store-based fulfillment strategy. You’re at the point where you’ll need to add more staff and require more space to fulfill orders effectively, which may not be cost-effective for your business. This is where a micro-fulfillment system will allow you to scale fulfillment much more effectively.

If it’s not broken, don’t fix it

For retailers that are pushing to optimize their shipping and delivery costs, it’s tempting to invest in whatever is the latest trend in logistics. But if your current approach is still working well, you could end up spending a lot of money and causing disruption for minimal gain.

It takes a lot of thorough analysis of consumer buying behaviors and long-term inventory trends to understand whether or not micro-fulfillment is going to offer serious benefits to your business. This is why it’s a good idea to partner with an experienced fulfillment provider who can assess whether or not a micro-fulfillment strategy is right for you.

Partnering with a 3PL with a national footprint like Whiplash enables your business to work with an experienced team that can design a fulfillment strategy that fits your exact needs. With 18 art-of-the-art facilities across the United States, retailers can leverage the power of decentralized fulfillment to exceed customer expectations and lower their delivery costs.

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