At the height of the pandemic, retailers invested in regional distribution centers (DCs) to accelerate their order fulfillment. However, now companies are cutting down on DCs to save costs. One recent example is the Silicon Valley-based startup Stitch Fix shutting down distribution centers in Dallas, Texas, and Bethlehem, Pennsylvania.
In 2024, Walgreens Boots Alliance announced plans to close 2 DCs in Florida and Connecticut. It’s not just retailers who are shutting down DCs for cost-savings. Logistics giant, UPS plans to close down around 200 distribution centers over the next 3 years.
Increasingly, companies are shifting from pursuing “business expansion” to “efficiency.” This also has echoes in the current trends of more job cuts and closures. According to the U.S. Bureau of Labor Statistics, the number of employees in warehouse and storage facilities has fallen to 1.85 million – the lowest count since November 2021.
Challenges facing regional distribution centers
Distribution centers face many challenges to their business operations and ability to meet growing customer demands. Here are some:
- Labor shortage
DCs find it extremely challenging to find and retain qualified workers. This problem is not just restricted to low-paid blue-collar workers. For instance, Walgreens CEO Roz Brewer also resigned in September 2023 – followed by many other high-level executives.
Additionally, without automation, regional DCs continue to rely heavily on human workers.
- Reduced capacity
As customer orders continue to increase, most DCs are unable to handle this growing volume with their limited capacity. Retailers struggle to keep up with growing demand, thus leading to long wait times, delayed shipping, and customer frustration. Increasing backorders can also impact the retailer’s revenues and bottom line.
- Rising costs
By downsizing the number of DCs, companies can potentially save millions of dollars. Retailers who experienced a sudden rise in online orders during the pandemic are now experiencing slow sales growth. For instance, Amazon opened nearly 300 facilities in 2020 but is now reluctant to open more warehouses to control their operating expenses.
- Inefficient inventory management
Among the serious challenges, distribution centers lack inventory visibility. For instance, they need to know:
- When each inventory item was received or shipped out.
- How the inventory item is being stored in the DC.
- How much time does it take to ship out any inventory batch?
Without efficient inventory management, companies can end up storing their inventory stock for too long. This leads to problems like loss of product value or damages (or wastage).
Benefits of moving from DCs to MFCs
With the changing pattern of consumer demands, it’s more feasible for companies to move from DCs to micro-fulfillment centers (MFCs). As compared to large DCs, MFCs are more compact – but offer a host of operational benefits in inventory management and order fulfillment. Here’s a look at some of their benefits (as compared to DCs):
- Smaller footprint
Large-sized DCs occupy a lot more real estate, thus incurring more business costs. Comparatively, MFCs are more compact and flexible enough to place them near the customers – especially in urban centers. Thus, MFCs are more cost-efficient for last-mile deliveries as they reduce transportation costs and improve on-time deliveries. According to McKinsey, last-mile logistics efficiencies can save between 13-19% of the entire logistics costs.
- Automated picking and packing
With the use of automation and robotics, MFCs can bring efficiency in inventory packing, picking, and dispatch. This helps retailers accelerate their order fulfillment and build stronger customer relationships.
- Decentralized operations
MFCs enable the decentralization of the order fulfillment process, thus reducing the strain on the limited number of distribution centers. Through decentralized operations, retailers are more prepared to cope with rising seasonal demands or sudden peaks in online orders. Effectively, MFCs can enable companies to adapt quickly to market fluctuations and dynamic customer preferences.
- Environmental impact
A recent Accenture report on the sustainable last mile highlights how MFCs can help in reducing traffic congestion and carbon emissions. With the use of MFCs, retailers can facilitate same-day (or next-day) deliveries, thus providing operational benefits and having a positive environmental impact. As the volume of online orders keeps increasing, retailers need to take concrete measures that make last-mile deliveries more efficient and environment-friendly.
Challenges of moving from DCs to MFCs
As compared to traditional warehouses and delivery centers, MFCs enable companies to fulfill their order in a quicker time and lower costs. However, the question remains if retailers can move from large-sized DCs to medium-sized MFCs without any operational challenges. The answer is no.
The first challenge is to source the right-sized facility in cities that meets the requirements of an MFC. Even though MFCs are generally smaller than regional DC, they still need a fairly large facility, which is expensive to find in densely populated urban locations. Adding to that, retailers need to build a network of MFCs across the city – instead of relying on a few facilities.
Additionally, MFCs require a lot of construction and installation time, which may run into months (or even years). Depending on their business requirements, retailers may also customize their MFC layout and design.
Companies need to wait a long time for a healthy ROI from their network of MFCs. Here are some cost-related factors that can impact ROI:
- High real estate costs
- Manpower costs
- Costly installation process
How Carte+ can make MFCs more cost-effective and productive
The global retail industry is gradually shifting from regional distribution centers to compact MFCs that ensure faster order fulfillment. Without automation, this transition is easier said than done.
At Cartesian Kinetics, we have reimagined order fulfillment through our Carte+ automation tool. Here’s how Carte+ makes MFCs more cost-effective and productive:
- Installation in less than 6 weeks
- Optimum space utilization with over 8-inch ceiling height
- Faster ROI of less than 2 years
- Designed for order fulfillment centers (with limited floor space) in urban areas
If you want to explore how Carte+ can be beneficial to your business, reach out to us today!