How the Hub-and-Spoke Model Can Improve Distribution for Rail Networks
Ever since Federal Express implemented a hub-and-spoke model and famously demonstrated its efficacy in Roger Frock’s Changing How the World Does Business, the well-known distribution model has been adopted by organizations in the transportation, healthcare, and aviation industries for the distribution of goods and services.
With the success of the hub-and-spoke model in the transportation and healthcare industries, the adoption by the rail industry should not be surprising, especially given the rail industry’s need for a more efficient distribution model.
Traditional point-to-point shipping can be inefficient for rail networks reaching low-volume destinations because it takes much longer to fill a railcar heading to destinations that do not require as much cargo. To avoid delays or sparsely loaded trains, more of the smallest railcars are needed at all the end points, which are more expensive to maintain.
Combining Small Customers into Large Customers
However, in order to successfully grow market share, railroads must cater towards small customers as well as the large players. Chris Anderson argues in The Long Tail that working efficiently with smaller-volume customers is an important next phase for commerce. To do this profitably, they need an efficient distribution model that builds large, full rail cars.
Low Volumes, Full and Pure Railcars
The hub-and-spoke model allows railroad end points to release trains to the hub terminal with full railcars of mixed destination using any size railcar available. The hub combines small volumes for less populous destinations from the entire network, and builds large, full, pure railcars for delivery. This allows rail networks to pursue low-volume cargo because it is no longer necessarily high in cost. With every rise in the price of gasoline, new market share is available to rail from trucking lines. The networks that can better reduce the costs of servicing smaller-volume customers stand to reap greater gains in market share. The opportunity exists for the rail network that can seize it.
There are currently only a few rail networks that have implemented the hub-and-spoke model, one of which is CSX’s Northwest Ohio (NWOH) Terminal in North Baltimore, Ohio. NWOH is a transrail hub, positioned to distribute goods between the East Coast and the Midwest as part of the National Gateway project. The rail network switched to a hub-and-spoke model to increase its market share by gaining smaller customers. In order to achieve this, its sorting hub must be efficient. Reducing the cost of the hub’s operations through automation and optimization is critical.
The Risk: Competition for the Large Customers
Even with an efficient hub, a hub-and-spoke network is not without risk. Loss of large customers is possible. In The Future of Intermodal Freight Transport: Operations, Design and Policy, J. W. Konings argues that reductions in rail regulations in Europe have allowed for new rail carriers to begin operations more easily. The newcomers compete by tailoring their services to the high-volume links in the network. Two hub-and-spoke carriers that faced this competition restructured their network to use direct routes in 2004. Konings reports that in a region that spans from Hamburg, Germany, to Le Havre, France, most rail carriers use a mixture of direct links and hub-and-spoke connections today.
Here to Stay
Despite these risks, hub-and-spoke networks are here to stay, and their adoption is arguably as significant an event in shipping efficiency as containerization itself. Catering to the large numbers of smaller customers is also a new standard. Shrink-wrapped solutions work well for the larger players in most markets, but the companies that can service the smaller players efficiently have a substantial advantage when growing their market share.