Hub and Spoke Model

Friends I am sure that most of you would have heard the term “Hub and Spoke” before. In this post, let us understand the “Hub and Spoke” Model in a detailed manner (with respect to FMCG companies).

There are several small towns and villages away from the cities where it is not feasible for the distributor in the city to supply goods due to constrains of time, transportation costs, etc. In such cases, a Super Stockist (SS) is appointed by the company who receives the goods from the depot and dispatches them to the Sub Distributors/Sub Stockists (Sub DBs). The Sub DBs in turn supply the goods to the retailers.

Each SS deals with numerous Sub DBs. The town where the SS is located is generally in the centre of the towns where the Sub DBs would be located (hence the SS represents a Hub and the Sub DBs represent the spokes). The prime task of the SS is to dispatch the goods to the Sub DB and a SS is generally not required to sell the goods in the open market. The SS gets a fixed percentage of margin and also in most cases, the freight incurred to dispatch the goods to the Sub DBs is reimbursed by the company.

The prime role of the Sub DBs  is to sell the goods to the retailers (retailing) and wholesalers in their respective towns, for which they get a fixed margin (the margins given to the Sub DBs are generally higher than the margins given to a SS because of the difference in volume). A company representative generally visits the Sub DBs at regular intervals and helps them in retailing. Pilot Sales Representative (PSR), Rural Sales and Distribution Representative, Interior Sales Representative are some names given to the company representative who works with the Sub DBs.

The PSR also serves as a link between the SS and the Sub DB, and is also responsible for adding new towns and Sub DBs. The PSR generally visits the Sub DB towns based on the volume of sales, future potential, competition, etc. It is also the responsibility of the PSR to ensure that the SS and Sub DBs focus on range selling rather than focusing on some selective products that are high in demand. Also, the PSR is required to ensure that goods are dispatched to the Sub DBs on a regular basis. Regarding this, let us now understand the two terms “Distribution Efficiency” and “Billing Efficiency”.

Distribution Efficiency: Distribution efficiency refers to the % of brands that are billed to a particular SS by the depot during a month. For example, if among 20 brands and 14 of them are billed to a particular SS, the Distribution Efficiency would be 70%.

Billing Efficiency: Billing efficiency refers to the % of Sub DBs to whom goods are sent by the SS during a month. For example, if a SS is responsible for dispatching goods to 10 Sub DBs, and goods are dispatched to 9 of them in a given month, the Billing Efficiency would be 90%.

I hope that the readers found this post useful. As always, suggestions and feedback are welcome!