Robotics & Warehouse Automation 11th December 2020

Centralized Or Micro-Fulfillment: One Fulfillment Strategy To Rule Them All?

Rueben Scriven
Rueben Scriven

Rueben is one of the warehouse automation industry’s leading analysts and is a regular speaker at leading industry events. He has moderated several panel discussions on the topic of commercial vehicle electrification and has also appeared on CNBC, providing insight on the global electric bus market.

In recent years, the concept of micro-fulfillment has gained significant traction. The expectation of same-day delivery is putting pressure on the centralized fulfilment model which is driving retailers like Tesco, HEB and Walmart to invest in micro-fulfillment technology. The huge spike in online grocery shopping in 2020 caused by the COVID-19 pandemic has further compounded this issue and forced grocery retailers to re-think their approach. Even Kroger, who signed a landmark deal with Ocado in 2019 for 20 CFCs, recently announced that it would be leveraging micro-fulfillment as part of its strategy. However, is micro-fulfillment the right solution for all retailers? This insight discusses some of the key variables which dictate which fulfillment strategy makes the most sense.

To begin with, we must first define what the four main fulfillment strategies are:

Manual in-store picking is when a store associate or third-party picker such as Instacart fulfills customer orders within a live store.
Manual dark-store picking is when an associate fulfills online orders within store that is closed to the public. Furthermore, the aisles and shelves are typically optimized for picking rather than retaining customers.
Automated centralized fulfillment, often referred to as the ‘Ocado Model’ is where orders are fulfilled from a centralized automated facility.
Micro-fulfillment uses a goods-to-person picking system under 3,000m2. Micro-fulfillment centres (MFCs) come in three flavors: retail-based MFC where the MFC is co-located within a live store, DC-based MFC where the MFC is co-located within a manual distribution centre, and stand-alone MFC which is housed within a facility dedicated to the MFC and not co-located to a store or DC.

One Fulfillment Strategy to Rule Them All?

There’s been a heated debate over the last two years on centralized vs micro-fulfillment with proponents of each party claiming they have the better fulfillment model. In reality, a fulfillment strategy will have a holistic combination of elements of each of the major fulfillment approaches. There are, however, some key variables which will help dictate which fulfillment strategy makes the most sense.

Expected delivery time

In scenarios where same-day delivery is preferred, it is often most efficient to pick orders as close to the customer as possible. Whereas in scenarios where a customer chooses a delivery slot one or two days after the order is placed, or when one- or two-day delivery is the norm, it can be beneficial to leverage the efficiency gains of a centralized fulfillment model such as an automated centralized fulfillment centre or a dark store if order volumes are low.

Delivery radius

A centralized fulfillment model can become very costly when the delivery radius is too large. This is why the centralized model works well in places like the UK with a more densely populated landmass while in the US, which is more sparsely populated, the centralized model tends to be harder to justify.

Uncertainty over growth

A micro-fulfillment model has the benefit of being a less capital intensive approach than centralized fulfillment. Costing around $5 million to build with an installation time of a matter of months, micro-fulfillment centres are an easy way for grocers to scale up their fulfillment automation without having to invest in large centralized fulfillment centres which take years to build and can cost as much as 10x more than a micro-fulfillment centre. If the last twelve months has taught us anything, it’s that growth in online grocery sales is extremely hard to predict and having a modular and scalable approach to automating online order fulfillment can be a huge advantage to grocers.

 

Fulfillment Automation: Who’s doing what?

Once the optimal fulfillment strategy has been chosen, grocers need to identify the correct technology partner. There are a few key considerations involved in this step. Firstly, to what extent does the grocer want to manage the fulfillment process beyond the automation itself? Companies like Takeoff Technologies provide the automation on a CapEx basis and provide a fulfillment-as-a-service model on top whereas other automation vendors supply the automation and control software and let the grocer manage the fulfillment operation. Ocado goes one step further and provides and full end-to-end solution from the automation to the front-end user interface and last mile delivery. The level of service provided by each fulfillment automation vendor.

Market forecast for fulfillment automation

To date, most automated fulfillment centres have used a centralized model such as Ocado’s CFCs and Rewe’s state-of-the-art fulfillment centre built by Knapp. However, we forecast a large penetration of micro-fulfillment centre equipment sales over the next five years. The graph below shows the share of micro-fulfillment automation equipment sales in the grocery sector as a percentage of total market for fulfillment automation in the grocery sector. The grey area corresponds to the addressable market for companies offering centralized fulfillment automated solutions such as Ocado. By 2024, we forecast that roughly one-third of revenues generated from the sale of warehouse automation equipment in the grocery industry will come from micro-fulfillment centres.

The majority of revenue comes from micro-fulfilment centres.

Final thoughts

COVID-19 has shaken the grocery industry to its core; online sales have gone forward five years overnight. During the first half of 2020, online sales accounted for 16% of Tesco’s total sales, up from just 9% the previous year. Whilst historically, investments in warehouse automation has focused on automating store replenishment distribution centres, COVID-19 has shifted the focus towards automating online order fulfillment centres.

To continue the conversation on micro-fulfillment centres, contact Rueben Scriven on rueben.scriven@interactanalysis.com