Hub-and-spoke logistics network design for third party logistics service providers

Third Party Logistics service providers (3PLs) are playing an increasing role in the management of supply chains. 3PLs offer a wide range of logistics services, e.g. warehousing and transportation services. We consider a 3PL company that is responsible for managing the inbound logistics of raw materials and components from multiple suppliers to several manufacturing plants. In this paper, we consider the hub-and-spoke logistics network design problem for 3PL companies. Our purpose is to decide on the number, location and operation of hub facilities so as to minimize the total logistics costs for the network. We formulate the problem as a mixed integer nonlinear programming model and linearize it using a step-by-step approach. Linearization of the model makes it possible to solve it to optimality using a standard optimization package. Numerical results reveal substantial cost saving as a consequence of using the hub-and-spoke network configuration compared to a direct shipment strategy.