Hub and Spoke System

Cameron Stevens Brigham Young University

Things to consider
What is it? Processes that can use a hub and spoke model How it works Benefits: Why use hub and spoke? Drawbacks Example: Lowes Application

What is a Hub and Spoke model?

Logistics term used to describe a transportation network of routes connecting origins to destinations Its name is derived from the hub and spoke model of a wheel

What is a Hub and Spoke model?

Companies centralize large distribution centers which essentially do three things
receive goods/information coming from many suppliers consolidate goods/information according to the location where they are to be shipped ship them individually to their final destination.

Processes that use Hub and Spoke

Manufactured goods:

e.g. Retail

Services:
e.g. Airlines

Processes that use Hub and Spoke

Information:
e.g. Financial Services

Technology:
e.g. Business Software systems

How it Works
Pure Hub and Spoke vs. Hybrid Hub and Spoke

How it Works
Hub and Spoke vs. Point to Point
One model consists of centralized transportation while the other model consists of many routes that are decentralized Hub and spoke design simplifies the network of routes

How it Works
Inter-hub (primary routes) Spokes (secondary routes)

How it Works
Design methods various models
weighted factor analysis centroid method linear models single and multiple allocation p-hub median problems

Benefits: Why use a Hub and Spoke System A hub and spoke distribution has several advantages that fall under these general areas
efficiency/ effectiveness economies of scale cost reduction

Benefits: Why us a Hub and Spoke System

Efficiency and effectiveness
ensures that most routes are full or close to full
reduces the amount of deliveries lost in transit

Benefits: Why use a Hub and Spoke System Economies of scale

By having larger loads, you take advantage of lower per unit costs

Benefits: Why use a Hub and Spoke System?

Transportation cost reduced
There is less time spent in transport which directly reduces the cost of the activity

Management costs
Management specialists generally focus on one location for distribution logistics

Drawbacks
Disruption at the hub

Bound by hub capacity Increased bureaucracy

Example: Lowes
How to create competitive advantage in distribution logistics Goals
gain market share higher profit margins

Example: Lowes
Logistics and transportation costs take up a large portion of the cost of goods sold Implementing the Hub and Spoke reduced transportation and distribution costs

Example: Lowes
The longer your assets are in transit, the higher your acquisition costs The key was reducing cycle time so that goods were being delivered at a quicker rate

Example: Lowes
Idle inventory can create problems with turnover and lower return on assets The key was decreasing the days in inventory by
reducing inventory levels saving on holding costs

Application
Finding an efficient method for designing a hub and spoke network
You have a situation where you have operation around a geographic area and you want to know where to locate a hub with respect to two factors relative distances? importance (load amount) of routes?

Application
Designing a hub and spoke model is only an advantage if designed properly To illustrate a design method, we will use the centroid method This is a method used to find the best location for a distribution center

Application
You are a sporting goods retail chain and are seeking to build a distribution center to serve your local operations around the intermountain west rather than having vendors deliver directly to local stores. 8 spokes or local branches exist within the geographic range you are looking to serve.

Application
Their respective coordinates are
(100,165), (205, 300), (296,267), (371, 400), (445, 457), (526, 500), (600, 185), (634, 616)

Their respective volume loads in tons per month are (000,000)

25, 100, 560, 320, 1200, 420, 1520, 690
Where do we locate a new distribution center?

Summary
What a Hub and Spoke model is and how it works Identified benefits and drawbacks to implementing the system Real world example Ideas on how to design one

Suggested Readings
Hudson, Scott, Success with Hub and Spoke distribution, Supply Chain Cooperative NC State University. March 14, 2003. Pirkul, An Efficient Procedure for Designing Single Allocation Hub and Spoke Systems, Management Science, 44:12 (1998) -Part-2 pg:S235 -S242 Elhedhli, Samir . "Hub-And-Spoke Network Design With Congestion ." Computers and Operations Research 32.6 (2005): 1615-1632.

Suggested Readings
Yaman, Hande . "Allocation strategies in hub networks."European Journal of Operational Research16 June 2011, Pages 442-451 211.3 (2011): 442-451. Horner, Mark W. . "Embedding economies of scale concepts for hub network design."Journal of Transport Geography 9.4 (2001): 255-265.