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Those of us old enough to remember the pre-iPad days of yore when something as simple as a prize in your breakfast cereal, like a decoder ring, was a momentous occasion, perhaps revealing the Trix rabbit’s mystery message or getting E.T. home (yes, he had his own cereal). While decoders at the kitchen table—and free gifts in cereal—are long gone, the concept of using a formulaic solution to a seemingly complex problem is timeless.

In the spirit of the long-defunct decoder, we will do our best to lay out a cut-and-dried way to decode a complicated problem we often hear these days: should we use a micro-fulfillment center (MFC) in our fulfillment network?

How does it benefit you? Serve more customers while reducing costs for order fulfillment

In considering any analysis to the question of when to invest in an MFC, we should always start with the benefits: what benefit could an MFC provide to our fulfillment network?

The answer to this question is two-fold:

1) increased ability to service more customer orders per hour (additional capacity), and
2) reduced costs to fulfill each additional order

It’s important to highlight that you should consider an MFC when there’s already proven and growing customer demand for orders. In other words, add an MFC to your network when there’s enough volume to eliminate manual order picking vs. a “build it and they will come” scenario.

In the instances where an MFC is built prior to existing volumes, the incentives can be thrown off such that strategic decisions are made to either send order discounts to customers or incur longer delivery distances. These are some of the unintended consequences when trying to meet the MFC’s capacity without sufficient customer demand.

In these cases, your utilization of a site has increased while the cost to service each order has risen accordingly.

Look at your cost per order and order demand then consult your crystal ball

With those two benefits in mind, the two data points in a breakeven analysis that can help determine whether a micro-fulfillment center makes sense in your network are:

a) your cost to fulfill each order by delivery speed, and
b) the mix of your projected order volume based on customer preference projected out at least three to five years.

This approach to demand provides an unbiased and unconstrained view of your customers’ preferences by order speed vs. your operational capabilities. If you only offer your customers basic delivery options today via standard shipping or next-day (in grocery), you should not expect the same order mix in three to five years.

The unconstrained view looks at where the market is going and what customers expect, so it’s important to look beyond your own organization to get a sense of the service speeds that are important to customers in your categories.

This approach aligns the organization around the customer’s perspective to take a clear-eyed view of your forecasted demand — and the cost to service those orders — to evaluate the potential value of an MFC.

Key consideration in your analysis: current network capacity

A final consideration in your analysis — aside from order volume mix and the cost to fulfill each order — is your network’s capacity today. Since the primary benefit of an MFC is the ability to serve more customer orders per hour, considering the capacity of the network (or a specific node) in relation to projected order volumes is critical:

• What is the theoretical capacity of your fulfillment network — or node — to fulfill daily orders?
• When does your network — or node — reach its theoretical capacity in relation to the projected order growth in your analysis? [If you’re fulfilling from stores, when does store fulfillment erode the experience for customers coming into the store, if at all?]
• What are your alternatives to expand capacity at the breaking point: new warehouses, stores, etc.? How do those compare to adding MFC automation to an existing site?

The view of network capacity is essential when considering your constraints to achieving growth and the costs/commitments of alternatives in relation to MFCs.

Your network capacity may not be an issue today; but if it will be in the next 18-36 months or even years, then it may make more sense to consider an MFC beyond the simple breakeven analysis.

Establish parameters for when an MFC might work in your system

So, there are three big pieces in the analysis: projected cost per order, projected customer demand mix and current capacity. What does a conclusion look like in its final state?

In the basic, hypothetical example below, note that the average cost to fulfill an order via current manual picking is $10, but the MFC reduces the cost of fulfilling that order to $7 — a 30% savings per order.

Assuming an MFC costs $5M to build out, the MFC will pay for itself at a site over a 10-year period if you transition this node from manual pick to an automated system at ~400 orders per day today, using projected order demand as a guide for volume growth over that period.

If your capacity at this site is close to or under 400 orders per day, then this perhaps makes even more sense in relation to other alternatives to meet your order demand.

This is a simplistic overview of what an analysis could look as there are many additional questions and assumptions specific to your company that need to be factored in, such as your alternatives to expand your network capacity, other projects in your portfolio, access to capital expenditure budget, etc. Like most models, any analysis is directional and ultimately relies on the art of management to assess an MFC’s potential use in relation to the business trajectory.

Have you considered an MFC for your fulfillment network? What other considerations have you found important to your analysis?