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4 Things We Learned From Microfulfillment Centers

April 15, 2022
Microfulfillment centers have become increasingly popular as retailers try to cope with the e-commerce boom and customers’ demands to receive orders faster. Here are four lessons we’ve learned from this trend.

Supply chain professionals are continually challenged to meet evolving needs among their customer bases. One of them is that people who shop online want their goods to arrive faster than ever. Microfulfillment center solutions solve that requirement by placing the products closer to the customers.

A microfulfillment center could take many forms. Some become dedicated parts of existing stores and rely heavily on automation. In other cases, a microfulfillment center gets established in a former retail location, giving it a new function that suits society’s changing preferences. Dark stores also fall under the microfulfillment umbrella. They primarily exist to get orders out to customers and don’t offer on-site shopping.

Finally, those considering installing a microfulfillment center would do well to keep the following four lessons in mind:

Lesson 1: Zoning Laws May Pose Challenges

Ideally, retailers can set up microfulfillment centers rapidly, making them more resilient during marketplace challenges. However, the reality is that business representatives may run into zoning obstacles. The specifics vary depending on the type of facility they want to set up. If a store has never had on-site fulfillment before, people must ensure zoning regulations allow making that change. The same is true if a company intends to set up a dark store or fulfillment location by repurposing a building.

In New York City, 12 city council members wrote to the Department of Buildings, raising concerns about potential zoning violations committed by rapid-delivery companies. One of the concerned parties worked with a civic tech group to create an interactive map showing the locations of all of NYC’s microfulfillment centers. It showed that 81% operated outside of districts designated for warehouses.

However, Department of Buildings representatives said these types of fulfillment centers are a new type of business not explicitly mentioned within the existing zoning laws. That was just the case in New York City, though. This is an evolving matter, and business owners cannot merely assume their microfulfillment center plans will align with existing or future zoning requirements.

In the Netherlands, city council members representing Rotterdam and Amsterdam voted to enact a year-long ban on dark stores. The matter became more complicated when one of the affected companies alleged the decision violated European Union law. Critics of the dark stores say the buildings do not contribute to a lively consumer environment and that they could exacerbate traffic issues.

Lesson 2: Third-Party Providers Can Help Smaller Businesses Compete

When supply chain decision-makers explore microfulfillment center solutions, they must realize that there are associated pros and cons. Such facilities may allow a business to expand and accelerate its e-commerce arm. However, they take significant investments and may require substantial changes to an existing building’s layout.

Business leaders must also evaluate whether creating a microfulfillment center could raise safety concerns.

Statistics from the United States indicate that five out of every 100 full-time warehouse workers get injured or fall ill in the workplace each year. The issue is not that a microfulfillment center automatically adds danger. However, if people don’t put careful thought into its design, it could pose hazards that put people at risk and cause workflow bottlenecks.

Microfullfillment challenges may be present in companies of all sizes but are more likely to crop up in smaller companies or those with more resource limitations. They want to compete with mega-companies like Amazon and Walmart but find that’s a daunting prospect. However, third-party logistics (3PL) providers can help fill the gap.

Steve Hornyak is the chief commercial officer of Fabric. His company has a network of automated microfulfillment centers that customers can use as a fee-based service. This approach eliminates the real estate and labor requirements associated with building one of these facilities from the ground up.

As Hornyak explained, “We’re providing an on-demand, same day—if not multi-hour—fulfillment for our customers and allowing them to not only be close to their customers but keep those customers close to them so they can manage that interaction. This is critical to moving forward, versus using an intermediary like an Amazon to manage that relationship.”

Lesson 3: Microfulfillment Centers Must be Strategically Located

A plan to utilize microfulfillment centers may not pay off as expected if companies do not have enough customers near those locations. Decision-makers must also weigh how factors such as traffic congestion or a lack of infrastructure in rural areas could make such facilities less feasible.

However, getting deliveries to customers can span beyond the area’s road networks. A drone trial in a small Irish town resulted in residents receiving their supermarket orders approximately 200 sec. after the goods left the store.

If a store has the space to convert part of its existing real estate to handle fulfillment, that strategy could work well if it is already well-located. However, the business may lack the space to take that approach. Opening a dark store elsewhere could be the smartest move in that instance.

Microfulfillment centers have helped repurpose shopping malls and other physical locations that fell out of favor with consumers. As Vikas Argod, director of supply chain operations at Chainalytics, recently explained, “Last-mile delivery continues to be a big portion of overall e-commerce delivery. Using malls for last-mile sortation allows for further consolidations of parcels resulting in lower costs.”

Fillogic is a company offering a suite of client solutions, including distribution hubs located inside former malls. Bill Thayer, co-founder and co-CEO of the company, said, “We started Fillogic to transform the traditional retail ecosystem into an integrated logistics network that reaches the modern consumer wherever they are. Fillogic hubs at mall properties provide retailers with disproportionately lower-cost logistics services while enabling retailers to maximize the utilization of their assets—stores, inventory and people—to unlock a competitive advantage.”

Lesson 4: Microfulfillment Centers Affect Real Estate Markets

Since not all microfulfillment centers involve retailers repurposing part of an existing store, the trend of using them has caused increased demand in well-located areas.

Charlie Farr is an executive at Lowe Rental, which provides commercial refrigeration equipment through rental agreements. Such an option is appealing to company leaders who need microfulfillment centers for temperature-sensitive items. But, Farr says he’s noticed increasing competitiveness as people try to rent a limited number of spaces in high-demand areas.

Farr explained in an interview: “You’ve got a lot of these online businesses competing for the same spaces, so what that means is prices are going up…availability and vacancy has gone down.” He said that has happened across the United Kingdom and Europe.

However, a market analysis suggested the problem could become more widespread. It forecasted that an additional 6,600 microfulfillment centers will exist in the global market by 2030. That is, at least, if the microfulfillment concept and its technology become permanent. The analysts also noted that, in the early years of the forecast period, such deployments would occur in the United States.

It’s too early to say what arrangements might occur to make these facilities possible. However, if competition increases, that effect could drive up real estate prices even more, plus put existing commercial real estate owners under pressure to sell to the companies that specialize in microfulfillment.

Microfulfillment Center Solutions are Worth Watching

These four lessons are not the only ones people will learn from the microfulfillment center trend. More worthwhile takeaways will become obvious as these facilities continue getting built and utilized.

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About the Author

Emily Newton

Emily Newton has eight years of creating logistics and supply chain articles under her belt. She loves helping people stay informed about industry trends. Her work in Supply Chain Connect, Global Trade Magazine and Parcel, showcases her ability to identify newsworthy stories. When Emily isn't writing, she enjoys building lego sets with her husband.