Transportation cost reduction - Hub and spoke design

Hierarchical Network Location Models – Hub-and-Spoke formulation

Basic Notions of Hierarchical sites

Often, Supply Chain Planners are interested in locating variety of sites which can interact with one another as per requirement and in more than one possible ways.

The hierarchy is in-general decided as per the kind of services being offered. For example, in the Banking system, ATM offers certain types of services in addition to basic feature of Money Withdrawal like deposit fund, mini statement etc. Branch office will allow patrons to obtain additional services like account opening, maintaining safety deposit box, housing loans, purchasing mutual fund. And the main bank in the city will offer further additional services like corporate loans. Likewise, in postal services or health clinics, one can think of such hierarchical design of sites. It is clear from these examples there is some implicit link between the facilities in terms of flow of product/services or information.

Additionally, it is useful to classify these sites in terms of services as well as area covered by them. This is usually done at the Zip code level and a particular customer segment is created which is catered by certain sites at different level. Hence it becomes imperative to carefully take the decision about the location as well as hierarchical level of sites under consideration.

Model Formulation

Speaking in terms of Retail or Manufacturing setup where flow of product/information is quite large from Plant to Warehouse and then stores, the location modeling for Hierarchical facilities is utmost critical as it drives and controls the lead time for product availability as well as the overall transportation cost.

Essentially planners are faced with two tasks:-

1. Which sites out of all candidate sites are to be chosen as NDC/RDC (Regional/National Distribution centers) or Dark hub – these will get supply from Vendor/Plants

2. Which parent DC fulfils the order to which Stores

While designing such formulation, the main objective for the planner is to minimize the demand-weighted total distance while not violating any of the constraints such as capacity and linkage.

Several extension of such formulation can be done like:-

1. Median-Based formulation focusing on meeting all demands while minimizing transportation cost

2. Coverage-Based formulation which tries to maximize customer service level from given number of sites allowed

3. Flow between the facilities is allowed

4. Facilities with proximity constraints

Hub-Spoke Formulation

Hub design is a fascinating utility which enables the logistics manager to serve much more demand nodes as compared to a fully connected pure network with the given fixed transport resource. Alternatively it can be said that we can serve the same number of demand nodes but with a far higher frequency of service using a hub-and-spoke network. Almost all major airlines have adopted hub-and-spoke network to benefit from the above reasoning.

A Fully connected Network vs Hub-and-spoke design

The main advantage of Hub-and-spoke design is that if there are economies of scale associated with transport system being used, the operating cost per ton-mile maybe significantly less in hub-spoke model as compared to fully connected network. Hubs can consolidate all of the flow originating (or terminating) at the spoke node

The disadvantage of a hub-and-spoke system is that for all origin/destination pairs except those for either the origin of destination is a hub, more than one transportation leg must be traversed to go from origin to the destination.

We at Milk-Run consulting specialize in designing and formulating Hierarchical Facility location models and Hun-and-Spoke Network design. Our consultants have many years of experience in network design for clients across the globe and bring cost-effectiveness in their logistics operations while reducing the broken promises for customers.

Please visit our homepage https://milk-run.co.in for more details or drop us a line at bd@milk-run.co.in with your requirement and we will be in touch.

Team Milk-Run