Updated: Sep 23
When you are given a number of locations (n) and need to connect them, there are n(n-1)/2 number of connections between all locations. As the number of locations increases, the number of connections increases exponentially as you can see in Figure 1 below. Because there are fixed costs and often a minimum variable cost component to transportation, there are wastage and inefficiencies in the overall system. This system is called the Point to Point Model.
Figure 1. – Point to Point Connections
The number of required connections can be reduced by using the Hub and Spoke system. A central hub is created to aggregate and forward shipments and then further shipped to the final destination. The number of connections can be reduced to n -1 connections with one hub. Figure 2 below shows that the increase in the number of connections is linear and significantly reduced. As you can probably guess, this model is called the Hub and Spoke Model because it resembles the hub and spoke of a wheel if you draw the connections on a map.
Figure 2 – Hub and Spoke Connections
By reducing the number of required connections, the hub and spoke model creates economies of scale at the hubs and also at the connections. For example, larger shipments have lower in variable costs (labor in the form of drivers and pilots and energy in the form of less fuel per shipment and reducing the number of shipments). Figure 3 below shows a Point to Point model and Hub and Spoke model with the same number of locations with three hubs.
Figure 3 – Point to Point and Hub and Spoke Comparison
There are potential downsides to the Hub and Spoke model. The hub may become congested if an inadequate amount of resources are allocated to them or if they are poorly managed. It also increases system risk because failure at hubs creates multiple points of failure while a point to point model isolates failures at the location.