In the logistics industry, disruption is gaining momentum. Amidst heightened competition and customer expectations, advanced technology and innovative business models have infiltrated the market to meet the growing demand. While prominent examples like drone delivery system and self-driving trucks have garnered attention, a novel wave of collaborative disruption is emerging in the logistics sector. This phenomenon is known as micro-fulfillment.
Micro-fulfillment can be likened to Airbnb, but tailored specifically for logistics. In a similar vein to Airbnb, which facilitates the rental of additional accommodation for guests, micro-fulfillment empowers individuals to transform their personal garages into corporate storage spaces. Historically, swift last-mile delivery has been a significant challenge for the logistics industry, particularly due to the often-extensive location of large warehouses beyond city limits. However, micro-fulfillment holds the potential to eliminate these challenges entirely, bring warehousing closer to the end consumer, and democratize rapid delivery for companies globally.
Consumers expect fast delivery, but small companies can’t compete
Businesses and individuals alike seek expedited and flexible delivery options. Moreover, consumers anticipate cost-effective delivery, often with complimentary shipping. For instance, Amazon Prime’s most prominent selling point is unlimited two-day free shipping. Similarly, Walmart recently introduced a similar service without the requirement for a membership.
The realization of rapid-speed delivery is facilitated by the utilization of artificial intelligence (AI) and analytics—a core aspect of Amazon’s strategy. Amazon employs over 100,000 robots in its fulfillment centers worldwide. These robotic arms facilitate the collection of bins, while hundreds of vertical shelves autonomously transport goods throughout each warehouse.
At Amazon, artificial intelligence (AI) is already extensively utilized to enhance the efficiency of its fulfillment centers. However, for smaller companies, there are well-known challenges in establishing large warehouses. Every $1 billion in e-commerce sales require 1.25 million square feet of warehouse space, with a substantial portion dedicated to last-mile delivery. Even if a company sells only a quarter of this amount, the associated costs are still substantial, not to mention the time commitment, geographical limitations, and other overhead expenses. In essence, the majority of companies cannot compete with Amazon’s or Walmart’s rapid logistics capabilities. Nevertheless, the advent of micro-fulfillment presents a potential transformation of this landscape.
With central warehouses, micro-fulfillment makes AI logistics available to the masses
In a parallel manner to Amazon’s utilization of human pickers to navigate its fulfillment centers using a tablet and select items from shelves to place in plastic bins, micro-fulfillment holds the potential to achieve this on a city-wide scale. Analogously to Uber’s operations, human drivers would be notified via an application to proceed to a neighborhood garage and retrieve items for delivery. While consumers currently anticipate the arrival of FedEx trucks at their doorsteps, in the near future, a last-mile delivery worker could potentially be anyone possessing a vehicle. On the garage owner’s side, the application would promptly notify them when they are required to return home to accept a shipment.
By employing central warehouses, deliveries can be brought closer to consumers. Notably, small warehouses situated in more centralized locations have already gained traction. Institutional investors are actively acquiring previously overlooked urban industrial buildings to serve as last-mile distribution spaces. In terms of rental costs, Class B facilities have demonstrated significantly superior performance compared to other industrial assets.
The supply market is already trained for micro-fulfillment
Fifteen years ago, micro-fulfillment would have been impractical. It would have been challenging to persuade property owners to lease garage space adjacent to their family residences for daily deliveries by delivery personnel. However, with the widespread popularity of platforms like Uber and Airbnb, the market has already been accustomed to utilizing its own space and collaborating with technology to execute logistics tasks.
In essence, micro-fulfillment will integrate the sharing economy into warehousing and logistics. Not only will it enhance the lives of consumers, but sharing logistics will also provide participants with a sense of social responsibility and reduce expenses for property owners and companies alike.
Therefore, both the supply and logistics sectors are already experiencing a demand for micro-fulfillment. Companies are competing to meet consumer expectations for expedited delivery and alleviate the challenges associated with last-mile delivery for centralized distribution centers. Consequently, micro-fulfillment represents the logical progression for a market that has already been conditioned to this approach. One-hour delivery is now within reach.
The Need for Automation
These factors are compelling virtually every major grocery chain to explore opportunities for automating e-grocery fulfillment. This endeavor presents several challenges. Firstly, it may entail integrating automation into retail stores that were never designed to accommodate such processes. The limited space within the existing retail footprint poses significant challenges for many traditional material handling systems. The alternative is substantial new investments in dedicated fulfillment facilities. Secondly, e-grocery order fulfillment cannot be fully automated. A substantial majority of orders will include a combination of non-perishable items—which can be efficiently managed through an automation system—along with frozen items and perishables, such as produce, deli products, and prepared foods, which do not lend themselves to automation. These non-perishable items are also frequently sold by weight rather than piece, introducing additional challenges. Given that the market is still in its infancy, grocers are compelled to assess automation solutions while simultaneously defining fulfillment processes that optimize the utilization of technology while preserving the flexibility of manual processes in ways that do not significantly compromise speed.
The One-Hour Mandate
Another variable that must be considered is consumer expectations and preferences, which are continually evolving and may vary within different neighborhoods within the same market. Currently, consumers in densely populated urban areas exhibit a preference for in-home delivery, while those residing in surrounding suburbs appear content with in-store pickup. Will in-home delivery ultimately surpass store pickup, or will a substantial segment of the market persistently choose to drive to the store to collect their orders? This question will only be resolved with time. Expectations regarding the speed of fulfillment are more readily predictable. Groceries are not a “want,” unlike many other e-commerce purchases. They constitute a necessity that is consumed continuously in most households, thereby generating the demand for short delivery times. Waiting even a day or two for grocery orders will be deemed unacceptable by many. Similarly, some e-commerce companies gained a competitive advantage by shortening delivery times, while large grocers are employing one-hour fulfillment as a target for e-grocery customers. This is a highly ambitious goal that may not be feasible in all instances, but there is no doubt that consumer expectations will swiftly be shaped by the circumstances where one-hour fulfillment is achievable.
Urgency and Uncertainty
Grocers are understandably experiencing a sense of urgency regarding the fulfillment of e-grocery orders. With the projected total market for e-grocery services reaching $100 billion by 2022, the stakes are exceptionally high. By successfully implementing e-grocery services, grocers can capitalize on the most significant growth opportunity the industry has witnessed in recent years. Conversely, failure to execute effectively can result in losing market share to competitors.
Despite the challenges and uncertainties inherent in the e-commerce landscape, grocers possess several distinct advantages. Firstly, they operate in a highly concentrated and localized market, which mitigates certain barriers associated with last-mile delivery. Secondly, local competition is typically limited to four or five retailers, enabling grocers to consolidate multiple deliveries within the same neighborhood, similar to a parcel carrier. Lastly, grocers have a robust local network of stores that can be utilized to support both home delivery and curbside pickup.
The key to their success in leveraging this asset lies in selecting an appropriate distribution strategy and aligning it with automation that enhances productivity, reduces fulfillment costs, and adapts to future market fluctuations.
Currently, grocers are employing various strategies to introduce automation and optimize the speed and efficiency of e-commerce fulfillment.
There are a number of strategies being employed by grocers today to introduce automation to improve the speed and efficiency of e-commerce fulfillment.
Hub-and-Spoke
Some grocery stores are developing centralized fulfillment centers that support multiple stores in a hub-and-spoke arrangement. These automated fulfillment centers assemble orders for all non-perishable items and then bulk ship those orders to the stores where they are topped off with perishable items. Completed orders are then available for curbside pickup at the store or delivery to the home. This approach allows the fulfillment facility and automation system to be designed in tandem, eliminating the space limitations imposed by integrating automation into existing retail locations. These facilities can also be designed to scale easily to accommodate continued growth by using modular automation solutions that enable a pay-as-you-grow approach. However, these facilities are inherently capital intensive and can create an additional layer of transportation between the hub where orders are fulfilled and the store where orders are distributed, potentially limiting the ability to support expedited orders.
Bolt-on Store Automation
In numerous instances, it will be advantageous for grocery stores to implement automation directly within their premises. Employing compact robotic automation technologies, they can establish compact fulfillment centers at the rear of the store, thereby automating current manual processes for non-perishable item selection while simultaneously utilizing store inventory to supplement orders with perishable items. This approach enables the fulfillment of complete orders from a single location, thereby reducing transportation time and associated costs. This scenario could potentially facilitate faster fulfillment times compared to the hub-and-spoke approach. However, unless the store undergoes physical expansion to accommodate automation, most locations will be unable to bring perishables and bulk items in close proximity to the automation system, thereby limiting the productivity of manual pickers who may still need to venture out into the store to complete orders. The establishment of a comprehensive fulfillment center may be feasible in certain locations, particularly high-volume stores with available space, through physical expansion of the store. This necessitates some additional investment, but it could enable these locations to attain order cycle times comparable to those of larger hub-and-spoke warehouses without the necessity of transporting orders to the store.
Micro-fulfillment Centers
The transformations wrought by e-commerce have presented opportunities to convert abandoned or underperforming retail outlets into micro-fulfillment centers that serve the same geographical area as a conventional grocery store, employing automated fulfillment for curbside pickup or home delivery. This strategy entails a reduction in in-store shopping experiences, making it particularly appealing to pure-play e-grocers. Nevertheless, it presents the opportunity to optimize the environment by efficiently integrating automated and manual picking processes. This approach allows grocers who lack an existing brick-and-mortar presence within a specific area to relocate fulfillment operations closer to customers, thereby mitigating transportation costs and facilitating shorter delivery times.
The Automated Grocery Store
Rather than bolting on automation to the back of the store, some grocers are experimenting with moving it to the middle of the store, creating a new type of grocery store that combines automated e-fulfillment with traditional shopping. This is still an emerging concept, but early executions place an automated storage and retrieval system in the center of the store which holds the majority of the non-perishable items with perishable and specialty items located around the outside of the store. Shoppers have the flexibility to place their orders in advance or while in the store and can choose to pick their own perishable and specialty items or have the store complete their order for pickup or delivery. It remains to be seen how integrating automation into the shopping environment in this way will impact the consumer experience and how consumers will respond to that new experience. A less intrusive approach is also being piloted in which large kiosks within superstores streamline the pickup of smaller orders. When shoppers place their order, they receive a bar code which is then scanned at the kiosk and their order is presented to them within seconds. While this approach allows shoppers to get in and out of the store quickly, avoiding navigating large stores and going through checkout lines, it is not well suited for the typical grocery order.