Cameron StevensBrigham Young University

Hub and Spoke System

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.