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

Point-to-Point vs Hub and Spoke 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.

Disadvantages

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.

Key Takeaways

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.

Despite unprecedented recent challenges, supply chain analysts say many 3PLs qualify as essential critical businesses. Without them, the businesses that rely on their distribution systems simply can’t survive.

Selecting the right logistics partner in a crisis has never been more important. You may even need to consider multiple 3PL partners to mitigate risk if your products are diversified.

The Basics

3PLs receive new inventory from manufacturers before shipping it to consumers. They can also handle retail distribution and returns. Ultimately, they deliver your orders with an out-of-box experience.

When should you enlist a 3PL?

With social distancing forcing some 3PL employees to work remotely, a 3PL partner that is efficient with automation and paperless warehousing is a good bet. Looking for those that began their digital transformations before the pandemic may be in a better positioned to service businesses and deliver your preferred customer experience.

Waiting until you’re overwhelmed by order growth isn’t a smart move. By breaking fulfillment promises you make to customers, you damage your brand. It also prevents you from being wholly focused on growing your business.

These three key questions will help you determine whether you need a 3PL:

Are you fulfilling a significant number of orders per day?

Calculate the costs of a potential partnership with a 3PL to stay fluid. Likewise, estimate the growth potential—opportunities you’re not currently able to pursue–by outsourcing fulfillment.

Are you running out of storage space for inventory?

Sometimes brands forget to include holding costs in their fulfillment expense calculations. Compare your current storage expenses with estimates from 3PLs. See if bundling costs with outsourced fulfillment is a better value.

Can your business’s infrastructure cope with the demand?

If you’re expecting a sustained spike in order volume—not just flash sales or promotions—estimate the costs and overhead necessary to meet demand. Compare with the costs of outsourcing fulfillment.

Types of Top Level 3PL Providers

The size and specialization of your business matters. Some 3PLs may only serve certain segments of the supply chain, or specialize in one or two areas. Larger established firms offer end-to-end execution, integrate seamlessly, but full service comes at a price.

Full-Service 3PL Providers

COVID-19 has made clear the importance of having real-time inventory visibility. The pandemic has also put efficiency in greater focus. Not only is knowing your stock levels a critical metric, so is operational efficiency and logistical considerations – does shipping inventory from the location closest to the customer actually show a cut in shipping costs?

Full service 3PLs offer:

• Inventory intelligence
• Brand the fulfillment experience
• Easy integration
• Same-day fulfillment

Warehouse and Distribution Type 3PLs

Warehouses that distribute are the most common type of 3PL – storing, shipping, and handling returns. Innovative warehouses can help you offer an Amazon Prime-like type of shipping in as little as two days. If you’re expanding aggressively, international warehouses can help build a global supply chain.

The best warehouses act as trusted advisors to their customers by offering product fulfillment workflow best practices. Especially with COVID-19’s impact on order volume.

When considering a warehouse solution, evaluate the following criteria:

• Warehouse network
• Pricing
• Shipping carrier rates
• Insurance
• Daily cutoff time for fulfilling orders
• Delivery service levels
• Management tools

Transportation Based 3PLs

A pandemic will spotlight how crucial it is to have a single point from which you can track orders worldwide, in real time, and automate delivery notifications.

Transportation-based 3PLs move goods between locations in-between locations. As an example, they might transport inventory between the factory and your warehouse, or you and your retail buyer.

Consider the following factors when choosing a transportation provider:

• Origin location
• Destination location
• Timeframes
• Shipping methods
• Service levels
• Pricing and discounts

Specialized May Be Better

Along with these top level types of 3pl services, there are a number that specialize on specific services, and combine select services such as distribution, or shipping and receiving among others.

Depending on the size of your business and unique needs, a specialized provider may be your best choice.