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Warehousing & Fulfillment

How to Use Hub and Spoke Distribution Models

Warehousing & Fulfillment
December 12, 2021
7 min read
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Learn how to lower time in transit and offset freight costs with a hub and spoke distribution model designed for businesses of any size or order volume.

What Is Hub and Spoke Distribution?

Hub and spoke is a term used to describe any process that resembles the wheel of a bicycle, where paths (spokes) shoot out from a central location (the hub). In the logistics industry, a hub and spoke distribution model is used to disperse inventory to multiple fulfillment centers from a large distribution center.

Large retailers and ecommerce marketplaces like Amazon use a hub and spoke distribution model, but mid-sized merchants may not carry enough inventory to fill a large distribution center. However, with solutions like Ware2Go’s on-demand warehousing model, merchants can aggregate their inventory with other businesses to negotiate affordable rates at strategically-located distribution centers.

From the distribution center, less than truckload (LTL) shipments can be combined on a single truckload when being dispersed throughout the network. This way, merchants can negotiate for lower full truckload (FTL) rates when shipping smaller amounts of inventory to fulfillment centers across the country. 

Learn more about Ware2Go’s On-Demand Warehousing Solution.

Examples of Hub and Spoke Distribution Models

The classic example of a hub and spoke model is the airline industry. Before airlines were deregulated in 1978, flights were all direct routes. When flying from one small market to another, flights were often nearly empty, which was highly inefficient. After deregulation, airlines started routing flights from smaller markets through major hubs like Atlanta. For example, if you’re flying from Greenville, SC to Tampa, FL, odds are, you’ll have a layover in Atlanta.

Amazon sellers who use FBA for fulfillment may be familiar with Amazon’s hub and spoke distribution model for fulfillment. Amazon fulfillment centers are distributed across the country to help shorten time in transit (TNT) and facilitate the fast delivery times Prime customers have grown accustomed to. FBA sellers have the choice to either:

  1. Prep and send their inventory to multiple warehouse locations as instructed by Amazon.
  2. Send all of their inventory to a single distribution center and allow Amazon to disperse it throughout the network.

Adopting this model can help businesses realize the same efficiencies that enable Amazon’s fulfillment network across all of their sales channels. For Amazon sellers looking to move away from FBA, it can even enable Seller Fulfilled Prime (SFP) capabilities or premium Fulfillment by Merchant (FBM) service levels.

Looking for more Amazon fulfillment options? Check out our complete guide to selling on Amazon without FBA.

Is Hub and Spoke Distribution Right for Your Business?

Merchants who are considering adopting a distributed warehousing model or who are already distributing their inventory but find their LTL freight rates are eroding their profits may be considering a hub and spoke fulfillment model for their business. Ahead, we’ll explore benefits to help you decide if it’s the best fit for your business.

1. Lower Time In Transit (TNT)

Time in transit (TNT) significantly affects the cost of moving inventory. A hub and spoke distribution model can help lower TNT and offset shipping costs at two phases of the supply chain: receiving inventory from manufacturers into your network and forwarding inventory to your fulfillment centers.

In an effective hub and spoke distribution model, the distribution center (or multiple distribution centers) should be strategically located close to major and/or secondary ports. Having a distribution center in Southern California can significantly lower TNT into your network. Once a container comes off the ship (likely in the port of LA or Long Beach), it will only have a few short hours to travel to the distribution center. Some inventory will stay at the distribution center, and some will be distributed throughout the rest of the network.

With an on-demand warehousing partner like Ware2Go, you will also be able to aggregate your inventory with other merchants, enabling you to distribute your inventory via full truckload (FTL) dedicated lane shipments rather than less than truckload (LTL) shipments. FTL shipments move faster through the network to get your inventory on the shelves and ready to sell quicker.

2. Improved Service Levels

Once the inventory reaches the distribution center (hub), it will be allocated to fulfillment centers across the country (spokes). This gets inventory as close as possible to its final destination (your end customer) to lower TNT on the final mile. The benefits are two-fold:

  1. Eliminate costly long-zone shipments to control final mile costs.
  2. Affordably meet consumer expectations for 1- to 2-day delivery.

Ultimately, improving service levels is just as much of a consideration for demand generation as it is for customer satisfaction and brand loyalty. Consumers today have the world at their fingertips when it comes to shopping online. On average, they compare options on three websites before making their decision, and 77% are more likely to purchase an item that can be delivered in two days or less. That means if your brand can’t guarantee delivery in 2 days or less, they will likely purchase from one of your competitors who can.

Delivery guarantees influence buyers at the top of the funnel as well. 69% of consumers report that they are more likely to click a display ad that mentions fast and free shipping, while Google reports that listings displaying their free and fast delivery tag have a 9% higher conversion rate.

3. Offset Freight Costs

One consideration when building a distributed warehousing network is freight rates. Most SMB’s will ship less than truckload (LTL) freight shipments to the warehouses across their network. Demand for LTL freight is at an all-time high. Merchants who can negotiate full truckload (FTL) rates can offset supply chain costs to realize higher margins

A strategic partner like Ware2Go will also help merchants monitor their order distribution and forecast demand according to geographic region. These insights will inform where inventory should be distributed and how much should be allocated to each region.

4. Lower Inventory Carry Costs

Some merchants may find themselves carrying excess amounts of slow-moving inventory. This can lead to expensive long-term storage rates that significantly erode margins. Ideally, slow-moving inventory should be stored in low-priority space. Using a hub and spoke distribution model, merchants can keep their “C” and “D” movers at a large distribution center at a lower storage rate and their “A” and “B” movers in more strategic locations. 

Hub and Spoke for Business Growth

The hub and spoke distribution model enables large retailers to meet consumer expectations for 1- to 2-day delivery without inflating their fulfillment and delivery costs. However, with an on-demand warehousing partner like Ware2Go, fast growing mid-sized merchants can realize the same efficiency in their own supply chain.

To learn more about how Ware2Go is simplifying the supply chain for businesses of all sizes, schedule a call with one of our fulfillment consultants.

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