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With more ecommerce adoption, brands and retailers are seeking ways to continue to make online shopping more convenient, and seamless.
One area where they’ve continued to make gains in recent years is the speed of delivery. In what felt like rapid succession, two-day became next-day became same-day.
These advances have highly visible results when customers are delighted by receiving a package quickly. But the systems that make these continuous gains in speed aren't always evident on the surface. At the same time, the expectation that items will be delivered quickly can leave brands and retailers struggling to keep up.
Behind the scenes, logistics has been undergoing change as delivery times get faster.
A fast-emerging piece of this evolution is an approach called micro fulfillment. It builds on the fulfillment center model, in which goods that are ordered often are moved to a central place. Once a customer places an order, items are picked, packed and shipped out.
When this model emerged, fulfillment centers were typically large warehouse facilities located in rural areas. While strategically located these centers in areas between cities could help them reach large swaths of the country, these centers are typically located further from population centers.
As delivery times must speed up, being closer to customers provides an advantage. Micro fulfillment adds smaller-scale warehouse centers that are located within metro areas. Placing them along popular shipping routes only adds to the benefits.
Vast facilities can be augmented by smaller centers in dense areas.
Clifton Cooper, director of automation and innovation at storage and warehousing solutions company Smart Warehousing, described the thinking this way: “Let’s build a network of these micro fulfillment centers, highly automate them, only keep a small inventory onhand and let’s build this network from our delivery centers to these small MFCs so we can get shorter delivery times to our customers to make them happier, so they’re not waiting on products that they’ve purchased.”
One advantage of this model comes in placement. After all, the closer an item is to a customer, the faster one can get it to them.
Inside the MFC, there are also a few key operational considerations to execute this. It requires knowing which items are most likely to be purchased, and matching them with what’s particularly in-demand for the community that surrounds the MFC.
The size of products must also be considered. Smaller items that can be stocked in volume are preferred, as opposed to big-ticket items that take up space, and may be purchased with less frequency. Certain categories, such as apparel, food and beverage and personal care, tend to lend themselves to MFCs better than others.
Then, the items must be moved into place ahead of when they are ordered, so they are ready to go when the buy button gets clicked.
In a certain sense, it means knowing what a customer will buy before they buy it. As Cooper puts it, it’s about being “pre-emptive.”
That’s a complex set of considerations. But when we asked Cooper about the key to making it all run, he had a simple answer.
“Data, data, data,” he said. “Data is gold."
Data is used to determine each of the points above, and optimize the process that gets the items out the door. Analytics is performed that takes each of the dynamics into account, and processes can be automated as a result. Across the industry, the technology that can be put to work to make micro fulfillment more efficient is advancing quickly, from machine learning models that predict indicators like low stock levels to robotics that bring efficiency and spatial advantages.
As the model grows, a number of approaches to micro fulfillment are emerging. Brands don’t have to stand up MFCs on their own, as many third-party logistics providers run delivery.
Major retailers with existing footprints are also putting their own spin on micro fulfillment as they seek to build logistics networks from their stores out. With large stores that already house goods in population centers, Walmart and Target are turning sections of their stores into micro fulfillment centers of sorts. From there, they work with contract delivery firms (like Target’s own Shipt) to bring packages to customer homes from there.
Showing the model's linchpin status to ecommerce operations, each company shared data about how many orders were fulfilled in stores on recent earnings calls. Target said 95% of its total orders were filled in stores in Q2, while Walmart pointed to 40% year-over-year growth in the metric. Target is also adding sortation centers where items are sent from a store for processing before heading out for delivery, with nine expected to be online this year.
In grocery, micro fulfillment is allowing grocers to enter a market without opening a store. Kroger recently expanded into Florida with just an ecommerce business, and no public-facing physical footprint. MFCs are an important part of the network, allowing for 30-minute delivery.
If executed well, the micro fulfillment model can help to save on costs. Proximity presents the potential to reduce transportation costs, and minimize the steps a package needs to take to get to the doorstep.
“If a customer is two states away versus two streets away, that’s a big difference in how much it costs to get that product to their doorstep,” Cooper said.
But a big advantage also comes in the customer experience.
Deliver a package quickly and on-time, and it improves the chance a person will seek to buy another.
Trending in Operations
The job market continues to hum.
The labor market continued to show strength to start 2023, as the monthly jobs report posted big numbers.
Key data from the U.S. Bureau of Labor Statistics’ monthly jobs report:
- Unemployment fell to 3.4%, ticking down from 3.5% in December to remain at historic lows.
- The economy added jobs to the tune of 517,000, which bested the 2022 average of 401,000.
- Average hourly wages rose by $0.10, marking year-over-year growth of 4.4%.
The Current’s view: The labor market continues to be an economic outlier. While there are signs of consumer pullback and belt-tightening among tech companies and retailers after months of high inflation, the job picture remains bright. While tech companies and some retailers are cutting back markedly, there are few signs of the widespread “pain” that economists predicted in this indicator of the economy.
What brands and retailers are thinking: Jobs are a major indicator of demand, and the labor market continues to hum along. That means the consumer pullback is tied to choices about discretionary spending and holding off on certain purchases in the face of high prices, moreso than being unable to afford items altogether.
What the Fed is thinking: Here’s more evidence that a soft landing might be possible. The Fed has been raising interest rates to bring down inflation. There is risk that this will slow down the economy, including employment. There was some slowing in job growth in December, but this report indicates labor market softening still hasn’t happened for a sustained period, even as inflation is cooling. After the central bank scaled back its latest interest rate hike to 0.25% on Wednesday, Fed Chair Jerome Powell said he sees a “path” to bringing down inflation without a significant rise in unemployment. Here’s one more piece of data to bolster that belief.
Keep in mind: The labor market is still out of balance between supply and demand. This report shows a big rise in jobs and the labor force participation rate remaining the same. Job openings actually increased in December, the Labor Department found. So there a still the case. Eventually, it will likely have to come into balance. But given the unpredictability of this economic era, it’s tough to know when, or even how.