In the never-ending quest to speed up order fulfillment and delivery, material handling systems integrators and supply chain consultants are helping retailers develop satellite fulfillment strategies designed to keep smaller, local distribution centers stocked with a steady flow of items from larger, strategically placed "mother ships." Driven by a rise in e-commerce and the associated consumer demand for near-immediate delivery, the satellite concept is set to reshape the way many retailers are designing their fulfillment networks.
"The thought process is to get the inventory as close to demand as possible with the least impact on transportation costs," explains Carlos Ysasi, vice president of systems integration for material handling solutions company Vargo. "You are trying to reduce the latter while at the same time being able to compete in the Amazon world, with same-day processing and next-day delivery."
The satellite concept—in which a retailer operates a series of regional master distribution centers that serve a larger network of small DCs located close to consumers—can help deliver on that promise by placing inventory closer to customers and easing challenges associated with last-mile delivery, Ysasi adds. The team at Vargo refers to the model as an "in-market DC" strategy that allows retail companies to utilize smaller local spaces in new ways and more easily manage transportation, labor, and automation challenges. Ysasi offers an example from the labor side of the equation: Retailers can utilize their physical stores or small warehouses as satellite DCs, giving them access to a local labor pool for picking and fulfillment jobs while easing the challenge of hiring such workers at larger facilities in hub markets (where third-party service providers and others may have a lock on such employees).
"Companies can experience 18 times more volume during peak season," explains Art Eldred, Vargo's client executive for system sales. "For the mother ships [large DCs], trying to hire all those additional workers is tough. If you change that to a satellite model, the task becomes easier."
The ultimate goal is to improve the customer experience in an era when that experience needs to be perfect, every single time. An e-commerce study released earlier this year by contract logistics specialist DHL Supply Chain found that more than half of logistics and supply chain management professionals in both business-to-consumer (B2C) and business-to-business (B2B) markets view the customer experience as one of the most important factors in determining the success of an e-commerce and omnichannel business strategy. Strong fulfillment capabilities can make or break that experience, according to Jim Gehr, president, retail, for DHL Supply Chain North America.
"Owning the relationship with the customer is where the value is," Gehr explains, adding that fulfillment is a "prime route to owning that relationship—fulfilling quickly, efficiently, and accurately. It's something that will increase sales per transaction and create lifelong customers."
Reducing transportation and freight costs is one of the biggest drivers behind the satellite or in-market DC concept, according to Ysasi and Eldred, who point to a criss-crossing of inventory that occurs in many retail organizations. It's not uncommon for retailers to bring product into the Port of Los Angeles, for example, and then ship it to a regional DC in Chicago, where it's unloaded, stored, and then picked, packed, and shipped back to the West Coast to fill both store and direct-to-consumer orders. Strategically placed mother ships and satellites can help eliminate those redundancies by placing the inventory closer to where it will be consumed in the first place, Eldred explains.
"Two-thirds of your supply chain costs are usually in transportation, not facilities," he says, adding that eliminating an overlapping leg of the fulfillment journey can "save you a lot of money."
Ysasi agrees, adding that "If you can save that freight cost—to customers and to stores—that's a huge win. Many customers we're working with are looking to reduce that [transportation expense] and pop up these in-market DCs."
Deciding how to re-allocate inventory in this model requires considerable data-mining and use of analytics, but it's worth the effort because it can lead to savings in other areas, Ysasi and Eldred add. On-boarding new employees—especially during peak season—becomes easier in a smaller in-market DC because the fulfillment processes are less complex. Implementing a smaller DC that cuts throughput in half—going from, say, processing half a million units on a peak day to 250,000 or fewer—allows retailers to combine manual processes with less complex automation strategies, including the use of collaborative robotics and autonomous mobile robots, they say.
The satellite or in-market DC concept is also being driven by mass urbanization and the need to deliver e-commerce orders to customers in densely populated areas. Supply chain and logistics consultant Marc Wulfraat told attendees at a recent industry conference that 54% of the world's population lives in urban areas today, a figure that will rise to 68% by 2050, resulting in even more pressure on retailers, carriers, and logistics service providers to develop fulfillment and delivery strategies that can serve those markets quickly and efficiently. Wulfraat is president and founder of MWPVL International, a global supply chain and logistics consulting firm that helps companies with supply chain strategy, facility design, and supply chain technology planning. During a workshop at the Material Handling and Logistics Conference 2019, held in September and hosted by material handling solutions firm Dematic, Wulfraat discussed how the trend is playing out in the grocery market today, as companies implement smaller DCs or "microfulfillment centers" (MFCs) in urban areas nationwide.
Wulfraat explained that the line between stores and warehouses in the grocery sector is blurring, with retailers opening facilities in urban markets that are dedicated to e-commerce fulfillment, click and collect, and home delivery. Smaller than traditional warehouses and automated with standardized material handling solutions—including robotics— these MFCs can be deployed quickly and affordably compared with larger automated facilities, he said. And although the model will play out differently depending on the industry, he says the trend toward MFCs and other versions of the small-footprint local DC is no fad, predicting that it will "explode" over the next few years.
No matter how it shakes out, the customer experience remains central to any good fulfillment strategy—especially in an environment where growth is being driven by e-commerce, according to DHL's Gehr.
"Retail growth is 90% e-commerce today, so to not have a strong e-commerce strategy means you'll be less significant," he says, adding that retailers must be able to effectively and efficiently meet that challenge by "using all the different fulfillment capabilities available—in store, [via] any number of warehouses, without delay."