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.