A hub and spoke distribution model offers the benefits of faster transit times and offset freight costs. But is it flexible enough to accommodate any size business or order volume?
What is a Hub and Spoke Distribution?
The term hub and spoke can be used to describe any process that resembles the wheel of a bicycle: a central location (or hub) that provides a fixed point from which delivery paths (or spokes) radiate outward.
In logistics, the hub and spoke system is used to coordinate inventory from a single large distribution centre to multiple delivery locations such as warehouses or fulfilment centres.
How Does a Hub and Spoke Model Work?
As mentioned, the hub and spoke model provides a means of distribution that relies on a central location (the hub) and a number of spokes leading out from that hub.
The main hub is where the goods are stocked, and the spokes represent the various distribution centres that deliver the goods to customers.
Hub and Spoke vs Point-to-Point Distribution Models
Examples of Hub and Spoke Distribution Models
This system is often used in industries like air travel and logistics, as well as retail.
The Arline Industry
In the case of an airport, a passenger might travel from New York to London. Using a classic hub and spoke system, the passenger boards a plane in New York, which flies to the London airport and then lands at Heathrow Airport in London.
The London airport, in this example, is the hub. The spokes would be the routes the plane takes to get to London from New York.
The Logistics Industry
With the help of preferred logistics partners, merchants can control inventory centrally, source products from the least expensive suppliers, and deliver goods to customers from local warehouses.
By aggregating their inventory at a centralized point, shippers can take advantage of more affordable rates. These less than truckload (LTL) shipments can then be combined to fill a single truckload which can then be dispersed throughout the network.
Using this model, small and medium size businesses (SMB’s) can negotiate for better rates often associated with full truckload (FTL) shipments.
The Retail Industry
Due to the efficiency of hub and spoke distribution, large (and some smaller) retailers such as Amazon have adopted the system to help expedite the flow of shipping to consumers.
For instance, to help shorten time in transit (TNT), Amazon has fulfillment centres distributed across the country to facilitate the fast delivery times consumers have grown accustomed to.
This model also helps SMB’s realize the same high efficiency a larger retailer fulfillment network uses across all of their sales channels.
Will Hub and Spoke Distribution Work for Your Business?
Hub and Spoke distribution systems are particularly useful for any industry that relies on the movement of physical goods through a supply chain. These systems are commonly used amongst retailers, wholesalers, and manufacturers in order to make their logistics operations more efficient.
As centralized distribution models, they are particularly useful for retailers that ship goods to customers from multiple locations.
They’re also very beneficial for manufacturers and wholesalers who have long supply chains. For example, a manufacturer in China ships parts to a plant in Thailand, which assembles the parts and ships the finished goods to a distribution centre in the United States, which then distributes the goods to retailers.
Businesses may also consider a hub and spoke fulfillment model for their business if they are already distributing their inventory, but have excessive LTL freight rates eroding their profits.
Here are just a few of the benefits of a Hub and Spoke distribution system:
- Increased capacity to handle peak periods – A hub and spoke system can allow for a quicker, more efficient delivery of inventory during times of peak demand. This enables businesses to avoid costly out-of-stocks and keep their customers happy.
- Centralized inventory control – Having your inventory distributed among several locations increases the risk that customers may not be able to get what they want. A hub and spoke system allows you to keep a close eye on inventory at all locations and respond quickly when there’s a shortage.
- Lower Time In Transit (TNT) – Time in transit significantly affects logistics costs. A hub and spoke distribution model can help lower shipping costs at two key points within the supply chain: receiving inventory from manufacturers and forwarding inventory to fulfillment centres.
- Easily trackable deliveries – With a hub and spoke system, each delivery is tracked. This makes it easy to spot where potential issues may be occurring and address them before they become serious.
- Better use of resources – Hub and spoke distribution systems help you make the most of your resources. For example, if you’re experiencing high demand in one area and low demand in another, you can redirect resources so they’re going to the places where they’re needed most.
- Lower costs – Hub and spoke systems can help you lower costs by using less warehouse space, renting less expensive real estate, and using fewer resources.
While hub and spoke systems are very beneficial for many businesses, they do come with some drawbacks:
- Higher inventory costs – The biggest disadvantage of a hub and spoke system is that inventory is often more expensive because of the need to rotate inventory among several locations.
- Fragmented customer service – Negatively affected customer service. Customers in one area may receive their goods more quickly than customers in other areas, for example.
- Inability to promote certain products – If you have certain products that are only available in one location, customers in the other locations won’t be able to get them.
- Slower response times – Because of the distance between spokes and the hub, it may take longer to respond to customer needs and ship products.
A Hub and Spoke distribution system provides centralized inventory control, making it easier to track deliveries and respond to customer needs for just about any physical product based business. As a distribution model, it can also make it easier to rotate inventory and use fewer resources.
However, like many other things, it does come with some disadvantages, including higher inventory costs, a fragmented customer service experience, and slower response times.
On the whole, after weighing the pros and cons, hub and spoke distribution systems are beneficial for a good variety of businesses that want maximized resources, efficient inventory flow and cost control.