Retailers with high-volume and purchase frequency are faced with the challenge today of determining how best to support their customers’ growing dependence on e-commerce. With the growth that occurred in 2020 and is continuing today, manual fulfillment processes at the store level are increasingly disrupting in-store shoppers, exacerbating labor shortages, and failing to provide the expected speed during popular order times. 

Some high-volume grocers have already addressed the limitations of manual in-store fulfillment through the deployment of micro-fulfillment centers (MFCs) that automate fulfillment processes closer to customers. Their experience can not only provide lessons for other grocers but for retailers considering MFCs as well.

Three Models

Today’s MFCs are coming in varying sizes and taking multiple forms, including in-store, hub-and-spoke and dark store. As the strategy has evolved, each approach has displayed some advantages and some challenges. 

In the hub-and-spoke model, retailers can leverage economies of scale to deploy larger automation systems that support multiple stores, but an extra layer of transportation may be required to get orders to the retail store for completion and pickup/delivery. Alternatively, the hub can deliver directly to customers, but this requires duplicating the entire in-store offering in the MFC or limiting the product selection offered to online shoppers.

The in-store model enables retailers to leverage in-store services and inventory to provide the same breadth of products to online and in-store shoppers. The challenge here is often carving out enough space in existing facilities to support in-store automation. 

While today’s last-mile automation systems offer excellent storage density, few stores have 10,000 feet of retail space sitting idle. They must either compress existing inventory or bolt the automation onto the back of the store through a physical expansion. Dark stores solve the space problem by converting the entire store into a fulfillment center that supports pickup and home delivery but sacrifices in-store shopping. 

The decision of where to locate the MFC is only one that must be made as retailers outgrow manual store-level fulfillment. They must also evaluate the range of automation systems available based on their speed and density; ensure control system software has the capability to support the distinct requirements of an MFC environment; and determine which products will go into the automation, which will be picked manually within the MFC, and which will be picked from store shelves. 

While there is a lot to navigate, some early adopters are finding success supporting e-grocery through MFCs. But their success has exposed an additional issue that must be addressed for them to scale their use of MFCs: the impact of the MFC on the main distribution center (DC).

Upstream Effect 

It’s easy to see in hindsight but this issue has been almost completely neglected in the various industry discussions about MFCs. The reality is that not only do MFCs put new demands on the DC, changes in the DC can streamline processes within the MFC and enhance its efficiency.

Replenishment schedules are one example of the upstream effects of the MFC on the DC. What happens to carefully calculated schedules when grocers add an MFC to a store, particularly if that MFC is serving as a hub for multiple stores? The MFC may increase the volume of business a store is doing each week, stretching inventories for fast-moving products beyond the comfort zone. Or, what if the MFC doesn’t have adequate space to break down the pallets traditionally shipped to the store? Could mixed case palletizing at the DC save time and space across each MFC in the network?

While best practices are emerging, there is no standard solution to this challenge. The upstream effect of MFCs will vary based on a number of factors, including the size of stores, the architecture of the distribution network and available space within the MFC. But here are some of the steps grocers are taking today to better harmonize DC and MFC operations.

• Enhancing carton handling processes. One change that can improve inventory management and prevent cluttering scarce MFC floorspace is shipping mixed-case pallets constructed in the DC based on the needs of a particular MFC. This may require some process changes or, for larger scale operations, the addition of new carton handling technologies like case shuttles and robotic palletizers.

These technologies can increase efficiency across the expanding MFC network as well as simplify the creation of aisle-ready pallets for more efficient restocking of store shelves. As retailers evaluate the potential impact of mixed-case pallets on the DC, it can be beneficial to work with an automation partner with both MFC and large DC experience and solutions. 

• Shifting unpacking. Can changes in the DC streamline restocking processes at the MFC? One solution being explored involves filling bins or bin-sized transportation units at the DC and shipping these “pre-loaded” bins to the MFC, where they can be entered into the automation system without further handling. This eliminates the unpacking and sorting required in space-challenged MFCs and allows economies of scale to be employed in restocking multiple MFCs.
• Aligning capacity with replenishment. Sizing the automation system to hold three days of inventory can be a good strategy unless inventory for the automation system is delivered as part of the store replenishment shipment that occurs on a four-day cycle. In that case, retailers may be continually fighting shortages of fast-moving products within the MFC. A high-density automation system can provide the flexibility to increase inventory within the current space so that replenishment and automation inventory cycles are aligned.

Not only do MFCs represent a physical expansion of the distribution network, they represent the opening of a new channel the upstream DC must support. Where other omni-channel retailers have had to adapt to support direct-to-customer shipments, the DC supporting MFCs must adapt to support direct-to-MFC shipments, which may look very different than traditional store replenishment shipments. 

Ultimately, the solution to this challenge requires a shift in mindset from thinking about MFCs as silos to considering them as part of the distribution network. If you’re evaluating the feasibility of MFCs, work with your automation system partner to take a holistic approach to planning that includes the DC. This will position you to get more value from your MFC investment and enable you to efficiently expand the MFC network when you’re ready.

Robert Nilsson is vice president of sales and consulting for consumer goods at Swisslog Americas.