Logistic

Learning Outcome:

1. Demonstrate a deep understanding of the logistic function concepts and theories as well as supply chain management strategies. (Lo.1.1)

2. Demonstrate the ability to understand complex issues pertaining to supply chain integration and strategic supply chain partnership (Lo 1.2).

3. Apply essential elements of core logistic and supply chain management principles. (Lo 2.1)

Critical Thinking

The purpose of this assignment is to identify and apply Logistics and Supply Chain Management concepts/tools to suggest logistics performance priorities.

Use Saudi digital Library (SDL) search engine.

Search Title: New Approaches to Supply Chain Management Concept. Logistics Integration of “Hub and Spoke” Model.

Authors Name: MINCULETE, Gheorghe; OLAR, Polixenia

Source: Valahian Journal of Economic Studies. 2014, Vol. 5 Issue 2, p21-32. 12p.

Read out the research paper carefully and based on your understanding you should answer the following questions.

Questions:

1. A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer’s request. Explain with an imaginary Saudi manufacturing company. – (5Marks)

2. Why in the current modern trade, the integration of economic affairs from design to completion is an important priority for every Manufacturing Companies?- (5Marks)

3. Define the parties involved directly and indirectly in the supply chain and their role in the smooth running of the business? -(5Marks)

• Reference should be included.

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New Approaches to Supply Chain Management Concept.
Logistics Integration of “Hub and Spoke” Model

Gheorghe MINCULETE

Polixenia OLAR
“Carol I” National Defense University, Romania

minculetegh@yahoo.com

Abstract
In the current modern trade, the integration of economic affairs from design to

completion is an important priority, which determines all economic options of companies
to focus on satisfying the needs of consumers and users to their loyalty.

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a
customer’s request. The supply chain not only includes the manufacturer and suppliers,
but also transporters, warehouses, retailers, and customers themselves.

Within each organization, such as a manufacturer, the supply chain includes all
functions involved in receiving and filling a customer’s request. These functions include,
but are not limited to, new product development, marketing, operations, distribution,
finance, and customer service.

This article stresses the essential aspects of supply chain management in modern
economics affairs, which are integrating under the functional aspect of the “hub and
spoke” model.

Keywords: supply chain management, hub and spoke model, hub and spoke

system, hub and spoke network, e-commerce

JEL Classification: L11, L

22

1. Introduction

The management of the supply-delivery chain aims to intensify the processes that

take place from the level of the suppliers of raw materials to that of the end customers. The
aim is to increase the added value and to improve the use of resources and the efficiency of
costs by bringing the required product at the indicated time and place with minimum
manipulations and without delays.

A supply chain means a flow of goods, services, money and information through
different situations (Tan, 2001). These units are legally independent companies, factories
or offices far from each other, geographically speaking, or organizational entities that have
the autonomy to take decisions regarding the information systems.

The concept of management of the supply-delivery chain is closely connected to
Michael Porter’s idea (1985), which expresses it as a chain of values based on the
processual vision on organizations. According to this idea, an organization can be seen as a

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subsystem composed of sub-systems, each of them with inputs, transformation
(conversion) processes and outputs.

Having in mind the logistic field, the management of the supply-delivery chain is
very important, because it covers the aspects that study the flows of materials and
information, the acquisitions and sales from an operative point of view, such as the
transports, orders and packing, but also aspects of a strategic nature, such as the
competition. Although there is a large number of definitions on the management of the
supply chain, this concept is more comprehensive than the concept of logistics. Thus, the
management of the supply-delivery chain emphasizes in essence the mechanism of
planning and control of the various economic flows from the suppliers of raw materials to
the end customers (Nurmilaakso, 2003).

More concretely, the concept of management of the supply-delivery chain is
problematic because the supply corresponding to the demand implies specific managerial
operations such as inventories or checks of the supply and delivery of goods and services.
Comparatively speaking, the management of the demand chain reflects operations like
orders or customer care. Thus, in these circumstances the management of operations is not
independent of the general economic situation. During times of recession, the management
of the demand is often used due to more intense competition. From another view point, low
competition leads in times of economic boom to a management specific to the demand. It
results that the management of the supply-delivery chain can be associated both to the
concept of management adequate to the supply and also to the one specific to the demand.

Experts think that the especially important role of the management of the supply-
demand chain is emphasized by the arguments presented below.

Internationalization of companies: globalization brought us to the situation where
the companies, even the medium sized ones, have branches in many countries. Because
operations are carried out over an extended geographical area, emerging needs require for
the rationalization of storage spaces and transports.

Complex products: products have become complex and a single company does not
own the necessary resources to achieve them. Because the development of resources from
zero requires time and efforts, it could be an option to use the existing resources of other
companies. Although a product is not complex, it often needs adjustment.

Changes in the conditions of the market: the rapid technological development had
as a result the shortening of production cycles. Because opportunities to make profit come
and go very quickly, the market is rapidly flooded and new products have to be brought on
the market frequently. For this reason, the needs and abilities of various commercial
partners must be rapidly identified. In these circumstances, the management of the supply-
delivery chain has an impact at least on the following essential objectives:

• the response time is the time lapsed from the moment when the customer places
the order until the moment when he receives it. Because a short response time increases the
degree of satisfaction of the customer, this objective increases competitiveness;

• the level of stockpiles has an important effect on profitability because a small
stockpile reduces costs. It also reduces the risk of products ending their shelf time.

• the total time is the sum between the time of conversion of raw materials into
end products and the waiting time. In principle, competitiveness and profitability should
not exclude one another. In practice, the growths of safety stockpiles may reduce the
response time. Similarly, a longer response time leads to reduced stockpiles. Because a
shorter total time produces more rapid reactions, this opens the way toward the
improvement both of competitiveness and profitability.

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The capacity to capitalize on / use the own production potential plays an important
role. On the one hand, under usage erodes both competitiveness and also profitability
because slow employees and obsolete equipment generate costs and not income. It is
possible that these costs be balanced with the income, but the adjustment of capacities /
potential may be costly in its turn. On the other hand, over usage rapidly erodes capacities.
Although profitable on a short term, the deterioration of capacities can be very costly on a
long term. In order to improve the use of capacities, the company must be capable of
selling its own capacity when this thing is possible and of buying capacity when it is
necessary (Nurmilaakso, 2003).

Specialty studies revealed the level of logistical costs between 10 and 35% of the
gross income of companies. Out of these logistic costs, 60% are destined to the
transportation of goods. A study conducted by the consultancy form PRTM considers the
companies with the best practices in moving products within the market as the
organizations that enjoy an advantage of 45% from the point of view of the costs of the
supply-delivery chain in comparison with the average of the competition (Abdinnour,
1999).

2. Functional aspects specific to the management of the supply-delivery chain

In the conditions of a complex and ever more dynamic modern market, the

necessity arises to immediately identify and satisfy the requirements of current and
potential consumers by using simple commercial systems (the “point to point” model) or
within a network (the model of the supply-delivery chain), which will allow efficiency and
profitability on a medium and long term.

If a solution of the point to point type is specific to a certain commercial partner,
the implementation costs can be very high. In this case, a profitable solution requires a
long term relationship and a high volume of transactions. Figure 1 presents the commercial
relationship between supplier and customers, which later requires the integration in the
supply-delivery chain, according to the domain of reference and specificity of the business.

Figure 1.

The “point to point” commercial model (supplier-consumers)

(Source: http://www.ipsera.com/assets/documents/ancarani_cp )

Because the commercial model previously presented is limited from the point of

view of the engaged resources (human, material, informational) for the capitalization of the
business potential of a company, the economic practice recommends as being extremely

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efficient to integrate the producing, supplying and service providing companies in supply-
delivery chains that are adequate to their field of activity.

In order to produce / provide the goods / services required by the market,
companies need to integrate themselves in supply-delivery chains. Thus, they
economically relate with “upriver” partners that is with suppliers of raw materials and
providers of specialized services, as well as with “downriver” partners, meaning firms
specialized in transport and distribution to customers (consumers and end users)(Kotler &
Keller, 2008).

According to the economic theory and practice, for an adequate functioning of a
supply-delivery chain, it must have, within its structure, the following types of firms and
beneficiaries: suppliers; producers; storehouses/silos; transporters; distributors
(wholesalers and retailers);* consumers/end users. At the same time, within any supply-
delivery chain a number of complex managerial processes take place, such as: the
management of materials, the management of acquisitions; the management of demands;
the management of storehouses, the management of transport, the management of
distribution of materials etc. Figure 2 emphasizes the structures and relationships within a
full supply-delivery chain.

Figure 2.
The Model of a full supply-delivery chain

(Source: www.contabilizat.ro)

Within a supply-delivery chain specific processes of integration of the structures

composing it take place. Thus, the integration can be internal or external and it requires a
lot of communication.

The internal integration occurs within an organizational component. It refers to
the integration of the applications from the various sales software and the systems of the
individual users. Experts suggest five approaches internal integration. These are oriented
toward data, toward the interface of the application, toward the method, toward the portal
and solutions oriented toward the process of integration (Goldfarb & Prescod, 2002).

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The external integration occurs between organizational components. These are
components within the same company or they belong to different companies. The external
integration includes the exchange of information with customers and suppliers at the same
time, as well as activities carried out through intermediaries. In the traditional trade, each
customer and each supplier can be automatized at an internal level, by connecting the
systems using manual processes such as the mail, fax or telephone. Through the web page
of the shop, the customer can see the supplier’s catalogue of goods and services and can
place orders directly in the system. Nothing is necessarily automatized in what the
customer is concerned. In the case of an electronic commerce portal, the customers enter
the portal in order to see the supplier’s catalogue and to place orders. The suppliers enter
the same website in order to see the orders and to honour them. Within the electronic
integrated commerce, the systems of the various companies exchange information directly,
which eliminates the manual processes (Goldfarb & Prescod, 2002).

In order to adequately correlate, relate and coordinate the firms integrated in a
supply-delivery chain, an adequate management is applied, which ensures a precise
distribution of resources and an exact synchronization of activities within a specific
mechanism of functioning. In the best-case scenario, the management of the supply-
delivery chain ensures a smooth specific functioning which reduces the response time, the
total time, the level of the stockpiles and it improves the capacity of usage. In the worst
case scenario, its failure leads to the redistribution of rewards and risks, which is costly and
does not create added value.

The model of reference of the specific operations within the supply-delivery chain
(according to the requirements of the Council of the Supply-Delivery Chain) emphasizes a
description of the specific processes, which are the planning of business, supply,
production, delivery, as follows:

• The plan: the planning of the demand/supply;
• The source: supply/acquisition of materials, the management of the supply

infrastructure;
• The production: achievement/execution of the production, the management of

the production infrastructure;
• The delivery: the management of orders, the management of stockpiles, the

management of transports and installations, the management of delivery infrastructure
(Nurmilaakso, 2003).

This model requires that participants in the creation and functioning of the supply-
delivery chain achieve a continuous exchange of information.

If we have in mind the supply sources (suppliers) necessary to a company that
produces the products required by the various markets, we must have in mind the specific
relationships within the supply-delivery chain related to the procurement of raw materials
required by the production process of that company. Thus, within this functional
mechanism, the suppliers within the supply-delivery chain get involved in the management
of the stockpiles of the producing company, with which they have normal and legal
business relations, by using the stockpile managed by the supplier system (Kotler & Jain &
Maesincee, 2009). To this end, the producing company transmits to the mentioned
suppliers information with regard to the planned demand, the current situation of its
stockpiles, other logistical elements etc. The information obtained allows suppliers to
intervene at the right moment to complete the stockpiles. Acting in this manner brings
about the positive economic effects expected within the producing company, which make
reference to the reduction of the length of the projected production cycle, of the number of

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personnel employed, as well as the level of the total costs. At the same time, it increases
the precision within the supply-delivery chain regarding the materialization of the
economic flows: inputs – conversion – outputs – distribution – full satisfaction of the
requirements of the consumers / users (Kotler & Jain & Maesincee, 2009).

According to the statements of the experts, there are four major decisions that need
to be taken by the managers involved in the functioning of a supply-delivery chain: the
way in which orders are processed (managed); the positioning and management of
stockpiles; the delivery (transport) of the goods to customers (Kotler & Jain & Maesincee,
2009).

The company cooperates with its customers and suppliers, who in their turn are in
competition with each other. Figure 3 illustrates the fact that a company can have several
branches and can be involved in several supply chains at the same time. Similarly, these
customers and suppliers can cooperate with the competitors of the company. There is an
equilibrium between competition and cooperation. Because management refers to decision
making, which requires information, the management of the supply chain requires
integration, which requires an exchange of information between participants. For this
reason, the basic challenges have their origins in the difficulties to achieve an equilibrium
between competition and cooperation between the participants in the supply-delivery
chains.

Figure 3.

Competition and cooperation within the network type supply-delivery chain

(Source: Nurmilaakso, 2003)

Figure 3 emphasizes a functional mechanism in the supply-delivery chain, which

reveals both its internal and its external side within the relational mechanism of the
network. The mentioned participants are not only different units within the same company,
because they often belong to different companies. The first case is linked to an internal
supply-delivery chain, because a participant has authority over the others. The second case
is linked to an external supply-delivery chain, because all participants have autonomy. This
latter case is more difficult than the former from several points of view. According to
experts, because the functionality of a supply-delivery chain is based rather on

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cooperation, competition is not necessary between the participating companies, but
between supply-delivery chains. However, the supply-delivery chains are not isolated, but
they often form a supply network.

3. The integration of a “hub and spokes” model in the management
of the supply-delivery chain

Companies that seek to expand their business but to preserve their advantage in

relation to their competitors must overcome the discrepancies that might appear between
the various components. In this context, the “hub and spokes” model facilitates a smooth
integration of the processes, ensures a good hierarchy and reduces the operational and
maintenance costs.

Within the “hub and spokes” model, all deliveries go through a central distribution
hub, often strategically located. The resulting map looks like a bunch of spokes with a hub
in the centre.

The hub is, almost literally, in the centre of attention. If the hub is too far from the
geographical centre, the time and cost of distribution are negatively affected. If the hub is
too far from the airport, port or railway station, this will lead to an increase of the
operational costs. Figure 4 presents a “hub and spokes” logistic model that includes
producers (spokes), intermediaries (wholesalers) and customers (spokes) (Lin & Lin & Lin
&, 2003).

Figure 4.
The “hub and spokes” logistic model

(Source: http://www.elsalvadorcompite.gob.sv/portal/page/portal/ESV/Pg_Biblio_logist/

MFA – Supply Chain Integration )

The location of the hub is essential and the entrance and exit of goods must be

done without blockages. Other factors are the storage costs, taxes, availability of
alternative routes and so on. It could be recommendable for several hubs to exist, but this
will lead to a more complicated functionality.

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If deliveries are constantly late or lost in transit and the distribution logistics go out
of control, it means that the time has come to take into consideration the hub and spokes
model.

In the field of transports, a distinction is often made between the direct transport
and the one conducted according to the “hub and spokes” model. The direct transport is a
connection between two points, which means transports that go in a single direction. The
characteristics of the “hub and spokes” systems refer to their organization under the shape
of a star. The hub is the nodal centre from where transports are done toward all the spokes
(Figure 5).

Figure 5

A “hub and spokes” logistic network

(Source: http://sinaslogisticsblog.blogspot.ro/2010/04/hub-and-spoke-system.html)

The “hub and spokes” model is applicable to the following forms of transport

(http://en.org/Spoke-hub_distribution_paradigm):
• The road transports imply heavy transport vehicles which require standardized

loading equipment (freight cars, pallets, boxes, caterpillars etc). The routes of these
transport means can be from “spoke” firms (suppliers, producers etc) to “hub” firms
(wholesalers, retailers etc), which manage specialized commercial storehouses, and from
here to consumers/users (companies or individuals);

• The transport of goods on railway, in which the loads are transported to a central
terminal. At that terminal the containers are moved on other cars, and the railway yards are
used to select the cars and compose the trains according to their destination;

• The air transport implies smaller airports as “spokes” from where the flows of
transport are directed to airports with large traffic potential of the “hub” type. If we have in
mind the flows of goods, we can consider (for example) that most of the flights of
company A go through the International Airport B, and a significant part of the FedEx
Express packages are processed in the “Super Hub” situated in the International Airport C.
This already reveals a “hub and spokes” system that is adequate to this type of transport.

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• The maritime transport, where small ships transport containers from various
ports to a central terminal where the containers are loaded on larger ships.

• The public transport of people uses various hubs which allow passengers to make
transfers between transport lines and transport means.

• For the individual transport, the “hub and spokes” model does not apply because
drivers in general choose the shortest route between two points.

The “hub and spokes” model in the field of logistics (presented in figures 3 and 4)
can be incorporated in the modern commerce. This model is usually based on a traditional
and electronic market that connects the hub company to the spokes firms. In this way the
commercial models are applied to businesses of the types B2B (Business-to-Business) and
B2C (Business-to-Consumer). And here, through the “hub and spokes” model, the
commercial partners are integrated through a hub. Thus, most electronic logistic networks
of the “hub and spokes” have a single form of allocation, a single option, as well as a
complex system of transport routes from the demand points toward the hubs.

The transactions within the supply chains which require businesses specific to the
electronic commerce include flows of information, products and funds. For example, the
following transactions can be carried out in the virtual space: providing information about
the products to participants in the supply-delivery chain; placing orders with suppliers;
permission given to customers to place orders; permission given to customers to monitor
the progress of the order; filling out and transmission of orders to customers; reception of
payments from customers (Chopra & Meindl, 2004).

Thus, in the field of electronic commerce the network is not just a broker, but also
an intermediary that creates demand for the suppliers and supply for the customers. The
commercial accord is prepared manually between the intermediary and the commercial
partner. The “hub and spokes” model is limited to interactions such as the search for
products, the updating of catalogues, orders and auctions in the virtual space and
operations of reading and writing within the portals. In order to reach a critical mass of
commercial partners, specific standards with maximum applicability are necessary.

The initial growth in the electronic commerce was recorded in the B2C supply
chains. The best known example is Amazon.com, which started to sell books on the
internet and extended to music, toys, electronic products, software and others. However,
most businesses in the virtual space are conducted between companies. At General
Electric, the employees order office supplies on the internet from already selected retailers.
Ford Motor uses the internet to facilitate the cooperation between the engineers in the
entire world in order to collaborate on various projects with the aim to create basic
components that can be used (Chopra & Meindl, 2004).

The “hub and spokes” system is the best known network system. The spokes in
the network constitute transport services between regional terminals and hubs. The hubs
are terminals or, in the case of railway systems, they can be railway nodes. Within the hub,
the transports are conducted from one line to another that connects the hub with the
terminals of destination. Ideally, the hubs are located as close as possible to the gravity
centre of the transport demand. This way the distances to be covered and the duration of
the transports between the terminal of origin and those of destination are minimized. The
total time of transport from terminal to terminal grows due to the supplementary distance
necessary for the transport to the hub and to the time spent in the hub. A “hub and spokes”
system is created in order to combine the small flows that come and depart for different
directions (Chopra & Meindl, 2004).

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Within the “hub and spokes” system there are pre-established transfer/re-loading
points that are usually situated near important transport routes and that are used for the
transfer of goods to regional distributors (Figure 6). The hubs describe the re-loading
points, while the spokes mark the flow of goods from and to the hubs.

Figure 6.
The “hub and spokes” system”

(Source: http://sinaslogisticsblog.blogspot.ro/2010/04/hub-and-spoke-system.html)

A hub and spokes network is a centralized and integrated logistic system created in

order to keep the costs at a low level. The hub and spokes distribution centres receive
products from many different directions, they consolidate them and send them directly to
their destination.

A “hub and spokes” logistic network is composed of hubs that have the role to
carry out transfer operations (like, for example, to re-assemble and re-direct loads
composed of smaller units) and of spokes or storehouses that have the role to connect the
end customers with the hubs (Zapfel & Wasner, 2002).

The mother companies and their subsidiaries or divisions have different needs and
that is why they need different business systems. The data within these different business
systems must, however, be integrated so that the organization functions as a whole. A
system that is suited to this end makes possible for the organization to develop effectively
as a business unit, within which the mother company acts like the hub of a wheel, and the
subsidiaries like its spokes.

While the “hub and spokes” model is currently predominant in organizations, it is
followed by the centralized model within which a single company maintains a constant in
the field of social and media efforts. We can observe this in fields like medical assistance,
finances, pharmaceuticals and in the case of a number of car manufacturers in order to
preserve a sensation of control in a coordinated manner.

Most often, companies launch a centralized multifunctional group (often known as
Centre of Excellence) in order to serve the various components through a common set of
services, models, software and knowledge. Within the “hub and spokes” model the
strategic decisions are mostly taken inside the hub, the results being later directed to the
components that form the spokes.

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4. Conclusions

A successful management of the supply-delivery chain requires many decisions
regarding the flow of information, products and funds. The conception, planning and
operation of a supply chain have a strong impact on the profitability and overall success of
the company. The planning of the supply-delivery chain establishes parameters within
which a supply chain can function for a certain period of time. During planning, companies
must include in their decisions a certain degree of uncertainty with regard to the demand,
exchange rates and competition for that period of time. Due to shorter periods of time and
better prognoses than the ones during the conception phase, they try to incorporate any
flexibility included in the supply chain during the conception phase and to exploit it in
order to improve the outcomes. As a result of the planning phase, companies define a set of
operational policies that govern their short term operations.

Within the operations of the supply-delivery chain, the time frame is weeks or
days, and during this phase companies take decisions regarding the individual orders
placed by customers. At operational level, the configuration of the supply-delivery chain is
considered to be a fix one and the planning policies are already defined. The aim of the
operations of the supply chain is to manage the orders placed by customers in the best way
possible. During this phase, firms allocate stockpiles and production to individual orders,
establish a deadline until which the order has to be honoured, generate lists of transport at
storehouses and place order to replenish their stockpiles. Because operational decisions are
taken on a short term (minutes, hours or days), the degree of uncertainty with regard to the
information about demand is reduced. Due to the constraints established by the
configuration and planning policies, the aim during the operational phase is to exploit the
reduction of the degree of uncertainty and the optimization of the performance.

References

Abdinnour, H. (1999) Network Design in Supply Chain Management. International,

Journal of Agile Management Systems
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Operations
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Teora,
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Nurmilaakso, J.M. (2003) XML-based Supply Chain Integration: A Review and a Case
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Porter, M. (1985) Competative Advantage: Creating and Sustaining Superior
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Tan, K. (2001) A framework of supply chain management literature (2001), European
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Zapfel, G., Wasner, M. (2002) Planning and optimization of hub-and-spoke transportation
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http://www.ipsera.com/assets/documents/ancarani_cp
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model
http://en.org/Spoke-hub_distribution_paradigm
https://gc21.giz.de/ibt/en/opt/site/ilt/ibt/regionalportale/sadc/inhalt/logistics/module_01/23

1_hubandspoke_network.html
http://sinaslogisticsblog.blogspot.ro/2010/04/hub-and-spoke-system.html
www.contabilizat.ro

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