Hub and Spoke System

1. Hub and Spoke System Cameron Stevens Brigham Young University

2. 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

3. 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

4. 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.

5. Processes that use Hub and Spoke • Manufactured goods: • e.g. Retail • Services: • e.g. Airlines

6. Processes that use Hub and Spoke • Information: • e.g. Financial Services • Technology: • e.g. Business Software systems

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

8. 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

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

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

11. 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

12. 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

13. Benefits: Why use a Hub and Spoke System • Economies of scale • By having larger loads, you take advantage of lower per unit costs

14. 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

15. Drawbacks • Disruption at the hub • Bound by hub capacity • Increased bureaucracy

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

17. 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

18. 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

19. 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

20. 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?

21. 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

22. 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.

23. 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?

24. 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

25. 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.

26. 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.