The rise of digital sales has many companies looking into more warehouse options, including the recent development of micro fulfillment centers. These locations can be tempting because they’re presented as a way to help companies generate more sales and improve customer support, but there are some limitations with their smaller footprint.
What are Micro Fulfillment Centers?
Micro fulfillment centers (MFCs) are smaller locations designed to perform specific fulfillment functions, often for local markets or smaller regions. They’re not nearly as large as a standard warehouse, usually 10,000 to 30,000 sq. ft., but their smaller size allows them to have the flexibility to provide targeted help. This includes only stocking high-volume SKUs to give you more space and prevent stockouts, targeting regional customers, and more. In most cases, MFCs are heavily automated because robotics can perform warehouse actions faster.
Because of the minimal size requirements, MFCs look very different from your average warehouse. Large retailers can easily turn part of an existing store or warehouse into an MFC to serve local customers and restock their stores. Companies can use off-site locations like small warehouses and storage facilities to create an MFC. There are also a growing number of third-party providers that offer fulfillment outsourcing. They prioritize storage facilities in large metro areas and offer services directly to sellers as well as national fulfillment brands.
If you think MFCs are right for your business, here are some pros and cons to consider before you decide.
Benefits of Using Micro Fulfillment Centers
There are three important elements of how an MFC can create a positive impact on your bottom line, either by improving the customer experience or reducing expenses.
Reduced delivery times and costs
A core benefit of MFCs is that they improve your ability to deliver goods to customers quickly. Transit time is lower because they’re scattered across the country, near your audience. Faster shipping can make your customers happier, and the closer distance will reduce your shipping costs on each order. The automation MFCs use will speed up pick-and-pack operations, allowing you to have later windows for same-day and next-day fulfillment, also assisted by the close proximity.
Decreased error rates
Automated picking via robotics enables MFCs to offer very low error rates for order fulfillment. Reducing errors is tied to both improving customer satisfaction and cost reduction because you’ll manage fewer returns, refunds, and exchanges. Typically, when you get an order incorrect, you’re on the hook for costs associated with returns, including paying for return shipping as well as resending the correct items.
Optimized inventory and omnichannel fulfillment
Automation makes it easier to split your inventory across various channels or locations, allowing customers to choose how they want to get their products. Grocery stores, for example, have traditional brick-and-mortar shopping mixed with BOPIS (buy online pick up in-store) orders and delivery via Instacart. An MFC in this store’s existing warehouse space would pick and pack orders for BOPIS while ensuring the store location has emergency stock in the event of a supply chain disruption.
Similarly, an ecommerce store could use an MFC for SKUs that are top sellers and usually purchased alone. This would position products closest to customers and enable quick fulfillment for the majority of its inventory, while other products are fulfilled from a more traditional warehouse. That enables faster fulfillment and minimizes the amount of space a company would need to rent (either directly or from a third-party fulfillment partner) in metro areas with expensive real estate.
The Bad Side of Micro Fulfillment Centers
There are a few cost, inventory, and location considerations that may keep companies from seeing a positive return on building an MFC or outsourcing fulfillment to an MFC partner. Below are some reasons to double-check if this option is right for you.
Robotics can be expensive
Generally speaking, robotics and automation tools can be expensive, which impacts the rates you pay. The equipment’s complexity can easily be a multi-million-dollar investment even before you pay for the physical facility, and either you or your partner will need to recoup that investment.
Not a fit for all SKUs
Automation costs also scale with products’ size and weight, meaning that fulfilling heavy items such as furniture can create significant wear on machines and may increase the chance of a breakdown. That being said, some products won’t be supported by MFC partners, in which case you’ll have a much more significant investment for your own facility.
Dependency on customer locations
MFCs operate best when located nearest to your major markets. When customer profiles and markets change, you can lose the speed and cost benefits an MFC offers. If you’re outsourcing to an MFC, this could mean you need to change partners or have to renegotiate contracts to move your inventory. If you’re leasing or own the location, you’ll have significant sunk costs that can harm profitability.
Ownership and labor considerations
Owning a micro fulfillment center requires an investment in infrastructure, people, and tools. You’ll need a warehouse large enough to store your goods, capital to invest in team members, and the proper management tools to hold everything together. That comes with all the related costs in terms of training, HR, benefits, and more. MFCs can have expensive labor or support contracts because of the robotics they require and backups you’d need to avoid downtime.
This risk can make outsourcing a smarter option.
For now, MFCs are likely to be the best option for two groups. The first are companies large enough to run their own centers and optimize them to meet local sales and regional end-consumer fulfillment. Their scope makes the cost viable because of the volume of their business. In many cases, they’ll operate multiple MFCs across the country to meet demand.
The other group is small companies with predominantly regional sales requirements. Outsourcing fulfillment to a partner with an MFC can help you reach a local market quickly and the partner typically has a smaller stock level requirement, so you won’t sink as much capital in stocking products.
If you have a small SKU profile, owning your own MFC will also keep costs down as you’re paying for less space and labor than a traditional warehouse. When your biggest customer segment is close by, savings on fulfillment and shipping costs and the ability to leverage speed for more sales can quickly make ROI positive.
The current ecommerce boom will make MFCs and other novel fulfillment operations a more permanent fixture of the supply chain landscape. If retail locations struggle to reopen, we just may see more former stores turn into these types of smaller fulfillment centers. Want to take the next step? Check out our blog on the cost of outsourcing fulfillment and find out if it’s worth it for your ecommerce company!
About the Author – Jake Rheude is the Director of Marketing for Red Stag Fulfillment, an ecommerce fulfillment warehouse that was born out of ecommerce. He has years of experience in ecommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.
Image provided by Boston Dynamics.