Why You Must Convert Your Traditional Distribution Model to a Hub-and-Spoke Model POST GST Era?
A hub and spoke model is essentially a centralized distribution system where customer premise equipment (CPE) inventory is processed and then shipped to smaller nodes or directly to consumers.
The smaller nodes may be smaller warehouses, office locations, local pickup and drop-off locations. Converting to a hub and spoke model has significant advantages for ecommerce, distribution and manufacturing companies which include :-
- Reduced Capital for Inventory and Lowering Facilities Costs are the primary reasons to convert to a hub and spoke distribution system
- Reducing the number of warehouses significantly reduces rent and other building expenses such as utility and maintenance expenses. In addition, lower operational and administrative overhead is achieved as taxes, insurance, telephone and other facility overhead is eliminated.
- Reducing the number of warehouses and centralizing inventory dramatically decrease the amount of inventory carried. Only the hub needs to carry a lengthy supply and nodes can switch to a more economic Just-in-Time inventory method.
- Moving goods between the Hub and Spokes becomes easier as logistics becomes simpler to manipulate.
- Increased Efficiencies as specialization takes the place of generalist performing multiple tasks. Functions positively impacted by centralization are
- Box and Setup
- Speed of moving goods between facilities and to the consumer increases
- Economies of scale result in cost savings because
- Mass shipping and receiving of larger quantities will lower inbound and outbound shipping costs
- Larger more efficient equipment such as copiers and labeling equipment replaces smaller less used equipment at remote locations lowering maintenance and repair expenses
- Centralized purchasing lowers per unit, shipping and administrative time as operating supplies can be purchased in larger quantities
- Inventory control is better by not having to reconcile as many locations
- Duplication or elimination of software packages and administrative tasks
- Lower Goods / Inventory Loss
- Ability to perform am accurate serialized inventory is enhanced. A serialized reconciliation provides detailed inventory information traceable by the serial number on each piece of SKU item. A full reconciliation tells you what is missing by gathering all records for the specified location from the billing system and then comparing it to the scanned data. Fewer locations needing to be reconciled means better control and Less Goods / Inventory Loss.
- Outside vendors, customer support shops can be minimized as economies of scale are developed thus reducing missing inventory
A hub and spoke system does have potential drawbacks and these should be recognized and planned for with contingency plans or adjustments.
From an operational standpoint the central hub has the potential to become a non-functioning bottleneck especially with regard to weather and other environmental problems.
In addition to weather related issues, poor operations management can negate virtually all of the above listed advantages to the point where customers must wait extended periods of time to receive inventory thus impacting revenues.
Thus, a Hub must always be operational, active, supportive.
Hire FLEXSPACE to help you hire ondemand / flexible warehouse spaces working as spokes or distributed godowns for your business.
Originally published at Flexspace Blog.