Micro-fulfillment as a way of life

Editor’s Note: The SCM thesis Micro-Fulfillment Feasibility for Metro Trade Area Transformation was authored by Sai Priyanka Jarugumilli and Feng Zhu and supervised by Dr. Özden Tozanlı ([email protected]). For more information on the research, please contact the thesis supervisor.

In the pandemic era where many people work from home and restaurants have switched to offering more offered take-out options, our sponsor company, a global coffee retailer, saw mobile orders surge to make up 80% of its sales. This coffee chain is now looking to cater to these different trends in customer demand, especially in metro areas densely packed with its stores. With customers gravitating toward curbside pickup, the retailer plans to redesign some of its cafés to give a higher priority to concepts like curbside pickup and pickup-only stores.

Since there is less need to provide a café-style experience in these new store types, they can be smaller than the retailer’s regular outlets. However, there is less space in smaller stores for inventory storage, so their supporting supply chains will need to make more frequent deliveries to meet customer demand while minimizing the volume of inventory held on-site.

To meet these requirements, the company is exploring placing distribution centers, known as Micro-Fulfillment Centers (MFCs), in dense metropolitan areas to enable faster and more frequent deliveries. The MFCs will enable stores to place small orders and receive unit product deliveries more frequently instead of more time- and space-consuming bulk deliveries. The MFC strategy also gives the retailer an alternative solution to reconfiguring its existing network of cafés to meet shifting consumer needs. Using existing stores requires the company to weigh the benefits of transforming select outlets into smaller, more convenience-focused stores that may enable lower occupancy costs against the increase in logistics costs associated with frequent inventory distribution and additional distribution centers.

The retailer tested faster delivery in New York City last year with great success. Stores could place orders every morning before 11 a.m., with guaranteed delivery before opening the next day. Stores saw lower inventory levels and higher satisfaction with the ordering and delivery put-away process. This success set the stage for establishing MFCs to serve stores with limited back-of-house (BoH) spaces in neighborhoods where rents are extremely high.

How do I start micro-fulfillment?

To validate micro-fulfillment, we identified potential locations for MFCs based on store proximity, transaction volumes, and store BoH space. We also evaluated the possibility of utilizing large stores’ BoH spaces as potential MFCs. This project simulated four different scenarios while varying the number of distribution centers and proposing the use of larger stores as alternative distribution centers.

We first performed a Greenfield analysis to decide how many distribution centers to build and where. Next, we simulated the scenarios to mimic the costs incurred to implement micro-fulfillment. Finally, we performed a sensitivity analysis to understand the impact of delivering different products more than once a day at different times on different cost parameters. We observed at least a 40% increase in total cost across all scenarios, predominantly due to investment in new infrastructure for MFCs. Additionally, while the increase in cost from one to two deliveries was significant, the increase above two deliveries per day was not. Similarly, delivering different SKUs each time did not significantly impact costs due to demand pooling and store-specific demand requirement.

I deliver every day. So what?

The implications of micro-fulfillment are what we call the “3 Ds”:

• Distance: By establishing distribution locations closer to the stores, micro-fulfillment minimizes the distance traveled for delivery to the stores, eventually reducing overall transportation costs.
• Density: Converting more stores to a convenience-focused format ensures high customer satisfaction. However, in areas where customer demand and density are low, store orders can be fulfilled with daily delivery, eliminating the need for micro-fulfillment. Locating MFCs closer to concentrated demand ensures higher responsiveness to store operations in case of unexpected demand surges.
• Delivery flexibility and frequency: The MFC strategy enables deliveries to be scheduled in flexible, more frequent time windows, optimizing the company’s warehouse and store operations. With stores receiving smaller deliveries, the retailer could potentially eliminate BoH spaces. Small orders also allow for alternative transportation methods to save on cost and emissions.

Despite its high costs, micro-fulfillment unlocks capabilities tied closely to the retailer’s new strategy. It complements the transformation of select conventional cafés to smaller stores, delivering significant savings in rent and labor costs. Our sponsor company can test out the concept by starting small and converting a few larger stores into MFCs, enabling them to gather real data about the market and customer response. To round out the new strategy, they can optimize transportation and delivery to the micro stores. While our simulation projects long-term savings for the company, we believe its operations will need to be fine-tuned by adjusting MFC locations and sizes as well as vehicle routing optimization as real results emerge.

Every year, approximately 80 students in the MIT Center for Transportation & Logistics’ (MIT CTL) Master of Supply Chain Management (SCM) program complete approximately 45 one-year research projects.

These students are early-career business professionals from multiple countries, with two to 10 years of experience in the industry. Most of the research projects are chosen, sponsored by, and carried out in collaboration with multinational corporations. Joint teams that include MIT SCM students and MIT CTL faculty work on real-world problems. In this series, they summarize a selection of the latest SCM research.

SC
MR