Implement the Hub and Spoke Model for Your Business

What is the hub and spoke model?

The hub and spoke model is a model of distribution for goods in which there's a single centralized hub. All the goods sent to customers come from this one hub before being sent to distribution centers and then to consumers.

The hub is the central location, while the spokes are the small distribution centers. Both are owned by the company and improve e-commerce fulfillment methods and other business models.

The hub and spoke business model is used by various types of companies, ranging from retail stores to airlines, but you can use it in your marketing strategy and other aspects of your business.

A hub and spoke approach focuses primarily on distribution and can be applied to anything you sell, from goods to content online.

For instance, a PR firm might use a hub and spoke distribution model for distributing press releases with a central hub where they can craft press releases and schedule them to be sent out via email to various publications.

On the other hand, a retail business might use a hub and spoke system to launch multiple shipments from a centralized location.

Overall, having a central hub makes internal and external processes more efficient for all types of businesses to increase delivery efficiency.

Hub and spoke model vs. point-to-point system

There are two business models an e-commerce company can choose regarding how products are delivered to customers: the hub and spoke model or the point-to-point system. A point-to-point system is the opposite of a hub and spoke delivery model.

With a point-to-point system, the item you're distributing goes from one point to the next. There's no central distribution hub.

Let's think about this in terms of e-commerce logistics. With a point to point system, a product is sent directly from the warehouse to the customer. However, with a hub and spoke delivery model, a product is sent from the hub to a small distribution center and then to the customer.

Transportation costs are typically higher the farther a product travels. But with a hub and spoke delivery model, more products are grouped together and shipped to a distribution center, where they can then be delivered to the customer.

Benefits of the hub and spoke model

There are many benefits of using the hub and spoke system for your business's distribution model, including:

Improves connectivity

A hub and spoke model improves the connectivity between a region's hub and distribution centers.

When all shipments are picked and packed from a central hub, it becomes easier to improve business operations and logistics. It's also much easier to invest in workflow automation when you have this connectivity in place.

For example, when a distribution center has a low inventory of a certain product, it can automatically reorder products from the central hub to reduce the time it takes to deliver products to customers. This helps to improve connectivity between the customer and business and results in better customer service.

Increases productivity

The hub and spoke model can improve your productivity in many ways.

With a point-to-point model, it can take longer for a product shipped from one end to reach another without first going to a smaller distribution center. In addition, picking up goods from multiple hubs can be confusing for delivery drivers, forcing them to make multiple back-and-forth long-distance trips.

However, with a hub and spoke model, your delivery agents can pick goods up from a distribution center within the same area and deliver them to customers more efficiently, reducing overall driving time and increasing productivity.

Reduces costs

The hub and spoke delivery model reduces distribution costs for retail businesses because it requires less space to store goods and reduces overall logistics costs.

With this model, you can transport goods from a single place to save time and fuel while reducing the total cost of inventory management.

Provides flexibility

This business model provides flexibility for retailers, allowing for more efficient delivery speed during peak periods like holidays.

Ultimately, the hub and spoke model scales with your business, enabling you to keep monitoring inventory and respond to shortages while cutting costs associated with scaling up delivery efforts.

Mitigates risks

One of the biggest risks associated with retail is running out of inventory, especially when there is a high demand for certain items. However, the hub and spoke model mitigates this risk by giving you more control and better inventory visibility to watch the stock levels at various locations.

Additionally, you can avoid the risk of lost packages by tracking deliveries and using resources more efficiently.

Challenges of the hub and spoke model

The hub and spoke model isn't the best solution for every type of business. Retail companies primarily use it because it's a distribution method, but that doesn't mean it's the best option for all retail businesses.

This retail business model aims to increase efficiencies within the supply chain, but it can result in hub congestion that affects your bottom line.

A few challenges of the hub and spoke model include the following:

• High costs: The hub and spoke business model can help you reduce logistics costs. However, it may increase inventory costs because you'll need to rotate inventory throughout several distribution centers.
• Customer service issues: Using a hub and spoke model can cause customer service issues because some customers will receive their orders faster than others, depending on where your distribution centers are located. However, as long you're transparent about delivery times on your website, most customers won't complain.
• Slow response times: Shipping products can take longer depending on the distance between various spokes and the central hub.

Applications of the hub and spoke model for businesses

The hub and spoke business model isn't just for retail and e-commerce companies. It can be used in any industry that distributes something, whether it's people, goods, or content. A few applications of this model include the following:

Transportation

The transportation industry is part of logistics and refers to the transportation and warehousing sector, such as trucking.

The transportation industry used to follow the direct-route system to deliver goods, but this was highly inefficient and cost businesses a lot of money. However, by using the hub and spoke distribution model, trucks, airplanes, boats, and trains can easily transport cargo from a central hub to the spokes, and then back again.

Airline industry

When you travel internationally, you might have a connecting flight along the way. For instance, travelers might board a plane in one city to another airport and then to their third and final destination.

In this example, the second airport is the hub, and the spokes are the plane's routes to get from one destination to another.

Supply chain

The hub and spoke model allows retailers to aggregate inventory in a central location where shipping partners can combine various shipments, which are dispersed to the spokes. In other words, the hub and spoke model distributes inventory to fulfillment centers from one large warehouse.

Retail

The hub and spoke model improves efficiencies for retail businesses, including brick-and-mortar and e-commerce companies.

For instance, Amazon uses this model to ensure fast shipping times. In addition, most retailers also have distribution centers across the country to store inventory from a central hub so they can easily be distributed to individuals in different areas.

Financial services

Believe it or not, distribution doesn't just refer to goods; it can also refer to services.

For example, your bank might use a hub and spoke model where they have a hub branch so you can open new accounts and receive financial advice.

However, they may also have spokes branches specializing in certain areas of finance or providing access to self-service solutions like ATMs.

How to know if the hub and spoke system is right for your business

The hub and spoke model can help you control inventory and make fulfilling your customers' needs much easier. Many goods-based businesses can benefit from this type of business model, but they should weigh the pros and cons.

For instance, while the hub and spoke model might mean faster delivery times for customers, it can also result in higher inventory costs that increase how much the customers pay.

So is the hub and spoke model right for you?

42% of companies feel the hub-and-spoke model is right for their business, but it ultimately depends on your logistics strategy. For instance, if you only operate within a particular region, you may be able to do without this model and instead use e-commerce marketing and logistics tools to manage your business operations.

Mailchimp easily integrates inventory management and supply chain logistics with your website. Try Mailchimp today to see if a hub and spoke system is right for you.