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ASCM Insights

Episode 25: What’s Happening in Micro-Fulfillment

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Bob Trebilcock: Welcome to The Rebound where we'll explore the issues facing supply chain managers, as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management and Bob Trebilcock, Editorial Director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments, now to today's episode.

Welcome to today's episode of The Rebound. It's a small world after all or what's happening in micro-fulfillment. I'm Bob Trebilcock.

Abe Eshkenazi: And I am Abe Eshkenazi.

Bob: Joining us today is Marc Wulfraat. Marc is the founder and president of MWPVL International, a supply chain consulting firm. Marc, welcome.

Marc Wulfraat: Thank you very much, Bob. Thanks for having me.

Bob: We're thrilled to have you here. Now. Maybe Disney was right. It really is a small world or a micro world, after all micro-fulfillment is one of the hottest topics in order fulfillment and distribution today, as retailers try to get closer and closer to their customers. It's especially true of brick-and-mortar retailers and their e-commerce operations. Just what is micro-fulfillment and how is this space evolving? That's what we're going to talk about today with Marc, who's been following this space almost since the inception of the concept. Marc, you and I were together when I toured my first micro-fulfillment solution in Salt Lake City at Dematics operations. A lot has happened in the two years since, and I think there's some confusion about just what is a micro-fulfillment center or MFC. How do you define it?

Marc: I would define it as being distribution center automation and that being applied to almost a retail context. Kind of a crossroads between distribution center automation and retail, and on a very small scale to enable a retailer to access a large metropolitan market with same-day capability to be more competitive with the incumbents in e-commerce. I think that's how I would define it.

Abe: Marc, when you take a look at the market space, third-party logistics providers, e-tailers like Amazon, they're building up networks, in a variety of different formats and in very different sizes. In the Amazon, you've got 40 to 50,000 square feet, but there's also a number of startups that are on the much lower end, typically less than 5,000 square feet. Give me a sense of, from when you're talking about micro-fulfillment centers, will both of those describe micro-fulfillment centers?

Marc: Original term micro center was really intended to describe something that would be, in that 5 to 15,000 square foot range, I would say. Hence the term micro meaning, particularly in the grocery sector, one would co-locate one of these micro-fulfillment centers within an existing supermarket store, since that original definition came out. I believe Takeoff was the company that turned or coined the term.

We've seen quite a variation of concepts emerge and, On the one end of the spectrum where you have the micro-fulfillment center in a footprint as small as 5,000 square feet. On the other end of the spectrum, you have the customer fulfillment center or CFC, which can get up to 350,000 square feet and then in the middle, you have what I would term the EFC, which is the e-commerce fulfillment center. Those can, they can be 30,000 up to 150,000 square feet. That is another high growth area of the marketplace is what I term the EFC.

Bob: Are MFCs primarily, even the EFCs, are they being primarily used for buy online and pick up in store? What are the models they're using in terms of fulfillment for the customer?

Marc: Definitely buy online pick up on, at a store, also buy online and deliver it to home. In order to do that, typically the scenario would be the MFC would be responsible for the portion of the order that can be automated. Then there's oftentimes a hub-and-spoke network that connects the MFC to a cluster of stores within a very tight geographic radius, typically 45-minute drive time. The portion of the order that comes out of the automation is transferred to the store that's nearest to the consumer. There might even be a top-off that takes place at that store for SKUs that can't be automated.

Then from there, either the consumer would pick up at the store or there would be a last mile delivery function to move the order to the customer's doorstep, that's one scenario. Another scenario is, and we see this in the cosmetic industry, set up a very small footprint MFC, and literally process the order in minutes and have it out the door so that the delivery of the merchandise is within hours of the time of order placement. There's different variations on the theme.

Abe: Marc, when you talk about the variations in terms of what's driving this, were are you seeing this trend prior to the disruption from the pandemic, or has this been accelerated or are we entering a very different market space right now with the MFCs?

Marc: No It's just the MFC concept was born pre-pandemic almost as though it was clairvoyant. This wouldn't be a big need at one point in time. I actually visited my first MFC back in 2019. That was in Miami over at Sedano's Supermarkets. When I saw that, the light bulb went on in my head and said, "This has the potential to be huge because we have hundreds of distribution centers, but we have tens of thousands of stores and not that all stores need an MFC." Quite often we have one MFC service in a cluster of say, 10 stores, but the market potential for MFC is huge.

What's driving this is really the need for speed and convenience. We've grown to love the convenience of having the ability to place an order online, and then to have it turned around quickly. In the beginning, the speed factor was less prevalent than it is today. Competition in the marketplace and particularly, Amazon and Instacart and other companies that are really developing competitive advantage around speed. This is what's driving the marketplace today.

Most companies prior to this level of competition intensity-- Most companies were quite happy with next day delivery and it's turning out that next day delivery is just not fast enough anymore. Today you look at what's going on in New York City. It's the poster child of what I'm talking about. You've got companies like Fridge No More and Gorilla, and others that are promising not two-hour delivery, but 15-minute delivery between the time of order placement and receipt of goods, and they're actually able to do it. That's beyond crazy. That's downright exciting to see how far people can push the envelope in terms of service level.

Bob: Marc, interesting to that 15 minute level that you just mentioned. I just did an interview with a company called Drone Express, which is doing a pilot with Kroger, and it's not really part of Kroger's MFC strategy, but rather the sole strategy where a Drone Express can deliver a five-pound package and, what they're targeting or what Kroger's targeting is customers who live within two miles of a Kroger store.

The idea is the 15-minute delivery that you can place an order because it's only five pounds. It's going to be a limited number of things in order but the Drone Express, a woman said to me, "Five pounds, will get you a chicken rotisserie dinner and all the fixings, but you can place the order, they can pick it, take it out to the drone hanger in the parking lot and, deliver it to your yard in 15 minutes," so that-- It's still at the pilot stage, but that need for speed is really coming through. One of the things that you talked about was that grocery was an early adopter. Two questions first, why grocery? Now that the concept has been around for a couple of years, are other retail verticals looking into the concept?

Marc: Yes. The answer to that question is yes. Why grocery? A lot of this just goes back to the moment in time that Amazon acquired Whole Foods. I forgot the exact year, but it goes back a few years now, and at that instant in time, the entire grocery industry went into the war room to figure out, what would be our next move and what emerged out of this whole exercise-- You had a technology company that is already, extremely capable in terms of raising the bar on speed of delivery and service level.

The first thing that Amazon did was they just basically made every single Whole Food store into also a distribution center in effect because, with the 500 Whole Foods stores that are out there, they quickly made the two hour home delivery capability an immediate service offering. How do you compete against that? If you're somebody that is just on, in the first aim, as far as e-commerce is concerned, a lot of grocery retailers immediately signed up with Instacart to get that similar level of service going.

That's really what led to the next level, which is the MFC concept, because there are a number of issues that grocery companies face when they partner with Instacart and not everybody wants to do that for a whole litany of reasons and so. The people that were more interested in controlling their destiny immediately started pounding the pavement calling for automation solutions to speed up the time that it takes to pick an order. What evolved, there's really two types of orders in the grocery world.

There's the express order. That's $35 that somebody wants in two hours and then there's the shop ahead order. That's more like $135, where they're perfectly happy waiting for tomorrow. In the world of grocery if you're going to do express, you can't go out with 20 orders for delivery. You can only go out with maybe two or three orders, reason being that if the person's got a non-refrigerated car trunk, they can't be carrying chicken breasts on ice cream for four hours as they go make their deliveries.

Everything was immediately designed around a very small radius around the store. When Amazon set up their own delivery capability, it was, order online, we'll deliver it to your house for free, $35 minimum order size, and we'll have it to your doorstep within two hours and when that happened, the whole world changed overnight, hence the MFC concept was born.

Abe: Marc, It's really interesting. Obviously, within supply chains, there's a lot of copycats. When you see one organization being successful, you tend to see quite a few jump onto it. As you're describing grocers and they're learning really quickly, looking forward, what are the strategies or network designs that you see that are emerging, that could be really game changers for a lot of these organizations?

Marc: Well, it's funny you ask because I'm involved in a number of projects right now where we're studying just that. The question that has to be answered is, if I'm a company and I have 200 stores, 300 stores, whatever that number may be, do I have enough urban density within a cluster of stores that costs justify deploying, an automated MFC solution?

This type of idea works well in metropolitan markets where you have high population density like Philadelphia, Washington, these types of places.

When you get into the rural areas where there's less population density, and it just doesn't make any sense at all, I cannot bring to do this. The first thing we look at is where the store is geographically located? Do we have enough density within a 45-minute radius to have a number of stores serviced by an MFC?

If so, what does it look like to process those orders from a cost standpoint, out of the MFC, transport them to the front of the hub, to the spoke stores, unload them at the spoke stores and top off, and then either do delivery or pickup from there. What does that cost relative to actually filling the order out of the store? What I've learned is that, the volume of orders that you push through the automation engine has to get to a reasonable level in order to make the math work. You can't be doing this on a small scale.

One of the issues is that automation has a relatively high ongoing operating expense associated with it. It's not just about the initial capex, you also have the maintenance of the automation system. You also have in some cases, transaction fees that are being charged by the MFC solution provider. You have to do the 10-year cost of ownership to judge whether or not it makes sense to even do this.

My understanding really is that companies that are jumping on the bandwagon at this early stage are either doing this for a higher volume, what I call EFCs, or they're doing access to get all of this activity out of the store. They want to improve the quality of life for the in-store shopper. When the in-store shopper's at the banana counter, trying to compete with 20 valet shoppers with their big carts with nine totes, that's not a pleasant experience.

They end up defecting and crossing the street and going to the competition. Much of this is also about just improving the quality of service for the online shopper. You're dealing with pristine inventory that's within an MFC that the public isn't touching. Much higher order fall rate comes out of that, but also just improving the quality of life for the in-store shopper, because the narrow supermarket aisle is no longer congested with all these valet shoppers. Those two are big wins in the grocery world.

That's why I think we'll see more of the MFC type investment into the future. I also think that we'll see more MFC investment, but on a larger scale, not so much the type of system that does 3,000 orders a week. More of the type of system that does 10 to 15,000 orders a week, which means big cities. The poster child of what I'm talking about is what Ahold Delhaize is doing with Peapod and Giant food stores in Philadelphia, they're putting up a 125,000 square foot warehouse, building their equipment with a large AutoStore system.

They're going to do 15,000 orders a week for the Philadelphia market, which is 6 million people. A lot of those people currently don't shop at Giant food stores today, which means they'll be able to increase sales to new customers that they previously didn't reach because the customer didn't live close to the store. To me, that is a brilliant strategy. That's going to make economic sense for Ahold when they go live with this next year.

Bob: Marc, last question, the solution you and I saw was, what's the miniaturized version of the highly automated goods-to-person solution? A few weeks ago, I had a chance to visit with Autostore at their New Hampshire headquarters and as you just mentioned that Autostore makes one of the competing solutions out there.

When I asked the Autostore guys what do they see in the market? They said their biggest competition is still manual fulfillment in the store. What's kind of the diversity of solutions you're seeing out there from Instacart or the store shopper pushing the cart with nine orders versus something like a Takeoff, (unintelligible) or Dematic or other store system. Just give us a sense of the landscape, take us out.

Marc: The majority of people are shopping from store right now and solved this issue. They have somebody, either their own personnel, or they have an Instacart relationship or shipped through one of these companies that does the valet shopping and the delivery function. Nobody in the grocery space wants to do the delivery function if they don't have to. It's convenient to have that relationship with Instacart to go and have all that work done.

The issue becomes the customer shopping on the Instacart platform, not your platform. The relationship they have is not with you, the retailer, and the relationship they have is with Instacart and that's becoming a thorny issue for many retailers. If your order volume is a 1,000 a week or less at a store, and most people seem to be able to handle that type of order volume from the store itself. That's the way they'll do it just to stave off any type of investment requirements.

Once you start exceeding a threshold and for some, it's a 1,000. For others, it's 5 to 6,000 orders a week. When they start seeing the armor crack, and once you exceed a certain threshold, life becomes unpleasant in the store. That's why, at some point you need to do something. If the online channel continues to grow, and we don't know where that's going right now, but if the online channel takes over even 20% of sales from the grocery world, there will be a very seismic shift towards doing something and that doing something doesn't have to involve automation.

It could involve a manual operation that's in a separate building that is a hub-and-spoke environment, that serves multiple stores, where people are picking with shopping carts, nine totes, nine orders at a time. There are people who prefer to do that because it's flexible, even they don't really know where this is all going to, and they don't want to spend a tremendous amount of capital on it. If there is a spike in volume, for any reason, you can always throw more bodies at the problem.

Automation tends to be designed to a certain scale and when exceeded it doesn't work anymore. There are companies that are looking to do things. SpartanNash is a classic example of a company that's doing things manually, for their particular needs. You're seeing in-store manual dark store, micro-fulfillment attached to a store, micro-fulfillment in a separate building, like call it an MFC dark store.

On the very other end of the spectrum is CFC, which is Kroger, Ocado story, large monolithic warehouses, the one they put in Florida near Orlando is servicing a radius all the way from Tampa to Jacksonville. There's quite a range of solutions that people can pick and choose from and each one has its pros and cons.

Bob: Marc. Thanks so much. By the way, I think the last point or one of the last points you made, which is really important, was also made by the Autostore guy, which is the retaining customer and the customer experience, has been a big driver for some grocers who don't want their customers shopping on somebody else's platform to shop in their stores.

They want to control the customer and control the customer experience. I was glad he pointed that out. That's all the time we have today. I want a special thanks to our guest Marc Wulfraat. Thank you for joining. We hope you'll be back for our next episode for The Rebound. I'm Bob Trebilcock.

Abe: And I am Abe Eshkenazi. Have a great day everyone.

Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.

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