Urban logistics: the new reality in retail

Anything at any time – this is what we now expect as customers and buyers. “Online retailers offer an ever-growing selection of products,” says Alex Dale, Global Retail Solution Consultant at Dematic. The number of goods aimed at very specific buyers has exploded in recent years. Just think of the flavors of yoghurt or types of ready-made pizza, and then add to that the lactose-free or gluten-free varieties. Our behavior as consumers has changed, as have our expectations and purchasing culture. To offer customers all of this (and at any time) requires a large distribution center.

How large? It is a well-known fact that journalists love football fields for conveying size. In this case the number of fields is 13, the size of a typical distribution center. Anyone can see that fitting something like this into an urban environment is simply not practical.

But a single, large distribution center in some far-away location is not functional either. Customers expect to receive their orders quickly — for example, if they order items for dinner at the office, they will want to pick that order up on the way home. “Consumer desire for speed and selection is making the items-per-basket in a typical shopping cart become smaller and more varied,” says Dale. These two trends have combined to present a challenge for the retail industry. What is needed is some sort of ‘endless shelf,’ which taken literally would of course be impossible. But in a figurative sense, that’s the goal.

Micro-fulfillment centers are one solution. These are small, automated warehouses that require little space. Around one-tenth of a football field, to be precise. Small enough to fit within the back room of a supermarket or to sit elegantly – and taking up little space – near residential buildings. “Anywhere in the city center or the suburbs,” says Dale. “The main thing is that stock moves closer to the customer.” Not in the form of one individual micro-warehouse, but as part of a network of warehouses.

“What matters isn’t the storage space of individual locations, but how closely a linked network of small storage spaces functions throughout the urban ecosystem,” Dale adds. This is how logistics within cities can be more targeted, with reduced overall distances. But most importantly, this approach can be scaled as required depending on demand. The more popular a product, the closer it is stored to where it is most wanted.

Of course, this approach has its challenges. The unexpected global pandemic in spring 2020 led to unexpected consumer behavior, highlighting just how precise deliveries and their underlying organization must be. Very suddenly, customers worldwide faced empty shelves as products usually bought infrequently and in small quantities (such as toilet paper, flour, and cleaning supplies) were now being purchased by everyone and in bulk. Companies and politicians promptly pointed out that there was no shortage of goods at all, they were just not where the customers needed to buy them, namely their local store. Instead, they were sitting upstream in the supply chain in distribution centers. This was a powerful example of how critical timing is in supply chains, how fragile these chains can be in the face of unexpected events, and how potentially important a connected network of warehouses in the urban ecosystem could be.

In contrast to centralized distribution solutions, micro-fulfillment centers are flexible and compact by design. Dematic systems, for example, can have three temperature zones — ambient, chilled, and frozen. Shuttles navigate storage aisles and bring the product to a picking station where an operator assembles the order. They are elegant solutions that allow stores to increase their holding power and throughput without additional space. This kind of small warehouse can easily hold about 80 percent of all the products that customers expect.

Getting customers what they want requires, among other things, software and data analysis. “After all, customer buying patterns are constantly changing,” Dale explains. “As consumers, our insatiable appetite for choice, innovation and inspiration when it comes to buying patterns keeps retailers on their toes to deliver a consistent experience year-round.”

Until just a few years ago, retailers understood ‘digitalization’ to mean primarily the software in the warehouse itself, but now it is all about the digital link from the manufacturer to the customer. One day, customers drop by the supermarket on the spur of the moment, the next they click and collect (order at work and pick it up on the way home), and the day after that they have their food delivered directly to their home. A micro-fulfillment center can enable this kind of multi-channel approach. Multiple centers can be connected by a digital infrastructure and to larger distribution centers outside the city.

Soon, 60% of the world’s population will be living in urban areas. This is likely to reinforce the trends of recent years, despite purchasing behavior still differing considerably from country to country. Click and collect, for example, is commonplace in the UK, but is not yet widespread in Germany. And in the USA, drive-through offerings have been around for decades. “Overall, this presents a challenge for global retailers,” says Dale. “Every country has its own way of doing things.”

Some trends such as online food shopping have become established worldwide. The number of people who prefer not to leave their home (they are busy, shopping is a chore for them, they are getting older, etc.) is rising. Still, there is an increased expectation for speed and availability.

Traditionally, supermarkets in North America had no need to think in terms of strategically networked ecosystems with decentralized centers. But urbanization is changing the parameters here, too. “Retailers everywhere will be looking more closely at their supply chains,” says Dale. “We are seeing a move away from centralized strategies toward hyperlocal sites everywhere.”

Micro-fulfillment is our response to these developments. It is the embodiment of a change in the market that will reduce costs for retailers and increase the speed of logistics. “We are reducing distance to make products available to consumers literally within the last mile of delivery,” says Dale.

Part 5 of the "Urban Logistics" series: Networks, data, and software are the key to success for urban logistics

Markus Schmermund about solutions that intralogistics may have for the last mile.