Day 4 of ProMatDX

Yesterday, Day 3 of ProMatDX, I focused on packaging. Today, let’s take a look at micro-fulfillment.

When I began doing interviews for our ProMatDX coverage, the one topic it seemed that everyone wanted to discuss was micro-fulfillment. Typically, but not exclusively, micro-fulfillment is thought of as fulfilling online grocery orders for home delivery or instore pickup from a highly-automated system. Moreover, it’s a system that’s been scaled down to fit in 8,000 to 15,000 square feet. Typically, that’s the backroom of a grocery store, but could include an addition built onto a store or converting a dark store into a fulfillment center that can service a group of stores in a hub and spoke model.

To learn more about the state of micro-fulfillment today, I spoke to three system providers working in this space: Knapp, Bastian Solutions and AutoStore. Of course, they aren’t the only three: Swisslog and Dematic, who I spoke to for Monday’s newsletter, are also playing in this space. And there are others.

The catalyst for micro-fulfillment is similar to what’s driving automation in other areas of distribution: The increase in the volume of online grocery orders, either for instore pickup or home delivery. That growth has been exponential during COVID. And make no mistake: At least for now, it’s a grocery phenomenon. “2020 was the year that every grocery had a volume of online orders they never anticipated,” said Andrew Benzinger, a business development manager focused on the e-grocery vertical for AutoStore. “I believe that every leading grocery chain is evaluating suppliers and solutions now.”

Associated with increased order volume are the increased labor costs associated with filling them in the store if you’re simply sending associates through the store to pick orders to a grocery cart. “That method resulted in a net loss of profit on every e-commerce order,” noted Kevin Reader, Knapp’s director of business development and marketing. “That was fine when you were seeing moderate growth. But when you look at the large grocers doing this at scale, it is insanity. You simply couldn’t continue because of the net cost to the enterprise.” Reader pointed out that the cost of putting up a micro-fulfillment center, or MFC, is about $4 million, and in some models can serve a number of stores. That compares to about $15 million to build a new, fully-stocked store. Knapp, working with its partner Takeoff, has close to 50 systems up and running now.

Now, this is still an emerging solution: Benzinger likened it to the move from the bleeding edge – the companies that are always first to adopt a new technology – to leading edge – the next level of early adopters. And, some end users are starting small. “In some instances, we are looking at very small systems with just 2,600 bins that we can scale up later,” said Alex Haines, a business development consultant for micro-fulfillment at Bastian Solutions.

With more systems and more experience comes learnings. “One of the things we’ve learned is that the analytics of how you drive inventory into the system isn’t driven just by SKU activity in the store,” says Reader. “Instead, the assortment strategy in the MFC is focused on what the best customers are buying.” Meanwhile, fresh food, and products in less demand by those desirable customers are in the manual picking area.

Grocers are also beginning to look beyond the actual fulfillment process – getting your groceries into a bag – to how e-fulfillment fits into an overall e-fulfillment strategy. “The transition is from how a grocer is going to automate the instore fulfillment process to how are they going to optimize the whole process, including last mile delivery,” said Haines. Reducing the labor spend for filling orders in the store is the first step; what follows is a network strategy that reduces the overall cost of getting orders into the hands of customers, regardless of the hand-off location.

To that end, groceries are tinkering with several models. One is a hub and spoke model, where one facility in a geographic area houses the MFC and fills orders for a group of stores within a certain radius of that store – say 30 miles. Vans shuttle back and forth between the MFC and the stores. Another is the dark store concept, in which a closed store becomes an MFC. Given the larger space, it can also replenish some of the stores in the area rather than bringing everything from a regional DC. But beware of the transportation costs associated with those models. “Grocers are looking at hubs and spokes now, but in the long-term, I think having a smaller system in the back of more stores will prevail because the transportation cost in the hub and spoke model impacts the profitability of every order,” says Benzinger.

In addition to strategy, the other two considerations are both related to labor: Can you operate the system with your store labor, and, who is going to maintain it? “One of the things we’re finding is that employees prefer working in the MFC to the store,” says Reader. “It’s a more exciting environment.” When it comes to maintenance, he added, much of that can be done remotely through monitoring. At the same time, some grocers are training and staffing their MFC’s with a maintenance person. “If you’re a grocer that is going to grow a network, you can amortize that labor cost across multiple sites.”

Reader added that Knapp is adding a technology training center in Atlanta “with the idea that in this growing market, we need a robust training operation as well.”